Chapter 12

Chapter 12 The Design of the Tax System

TRUE/FALSE

1. The average American pays a higher percent of his income in taxes today than he would have in the late 18th century.

ANS: T DIF: 1 REF: 12-0NAT: Analytic LOC: The role of government TOP: Tax burdenMSC: Applicative

2. The U.S. tax burden is high compared to many European countries, but is low compared to many other nations in the world.

ANS: F DIF: 1 REF: 12-1NAT: Analytic LOC: The role of government TOP: Tax burdenMSC: Applicative

3. Poor countries such as India and Pakistan usually have low tax burdens.

ANS: T DIF: 1 REF: 12-1NAT: Analytic LOC: The role of government TOP: Tax burdenMSC: Applicative

4. The U.S. federal government collects about one-half of the taxes in our economy.

ANS: F DIF: 1 REF: 12-1NAT: Analytic LOC: The role of government TOP: Tax burdenMSC: Applicative

5. Individual income taxes and social insurance taxes generate the highest tax revenue for the federal government.

ANS: T DIF: 2 REF: 12-1NAT: Analytic LOC: The role of government TOP: TaxesMSC: Applicative

6. Individual income taxes generate rougly 25% of the tax revenue for the federal government.

ANS: F DIF: 2 REF: 12-1NAT: Analytic LOC: The role of government TOP: TaxesMSC: Applicative

7. Income taxes and property taxes generate the highest tax revenue for state and local governments.


8. Sales taxes generate nearly 50% of the tax revenue for state and local governments.


9. Some states do not have a state income tax.

ANS: T DIF: 1 REF: 12-1NAT: Analytic LOC: The role of government TOP: Income taxesMSC: Applicative

10. By law, all states must have a state income tax.

ANS: F DIF: 1 REF: 12-1NAT: Analytic LOC: The role of government TOP: Income taxesMSC: Applicative

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782 Chapter 12 /The Design of the Tax System

11. Social Security is an income support program, designed primarily to maintain the living standards of the poor.

ANS: F DIF: 2 REF: 12-1NAT: Analytic LOC: The role of government TOP: Government spendingMSC: Applicative

12. A budget surplus occurs when government receipts fall short of government spending.

ANS: F DIF: 1 REF: 12-1NAT: Analytic LOC: The study of economics, and definitions of economicsTOP: Budget surpluses MSC: Definitional

13. A budget surplus occurs when government receipts exceed government spending.

ANS: T DIF: 1 REF: 12-1NAT: Analytic LOC: The study of economics, and definitions of economicsTOP: Budget surpluses MSC: Definitional

14. A budget deficit occurs when government receipts exceed government spending.

ANS: F DIF: 1 REF: 12-1NAT: Analytic LOC: The study of economics, and definitions of economicsTOP: Budget deficits MSC: Definitional

15. A budget deficit occurs when government receipts fall short of government spending.

ANS: T DIF: 1 REF: 12-1NAT: Analytic LOC: The study of economics, and definitions of economicsTOP: Budget deficits MSC: Definitional

16. As of 2005, the largest source of receipts for state and local governments was individual income taxes.

ANS: F DIF: 1 REF: 12-1NAT: Analytic LOC: The role of government TOP: TaxesMSC: Interpretive

17. As of 2005, the largest source of receipts for state and local governments was corporate income taxes.

ANS: F DIF: 1 REF: 12-1NAT: Analytic LOC: The role of government TOP: TaxesMSC: Interpretive

18. In the United States, all families pay the same proportion of their income in taxes.

ANS: F DIF: 1 REF: 12-1NAT: Analytic LOC: The role of government TOP: Taxes | IncomeMSC: Interpretive

19. One reason for the projected increase, over the next several decades, in government spending as a percentage of GDP is the projected increase in the size of the elderly population.

ANS: T DIF: 1 REF: 12-1NAT: Analytic LOC: The role of government TOP: Government spendingMSC: Interpretive

20. The administrative burden of any tax system is part of the inefficiency it creates.

ANS: T DIF: 1 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: TaxesMSC: Interpretive

21. One characteristic of an efficient tax system is that it minimizes the costs associated with revenue collection.


22. The administrative burden of complying with tax laws is a cost to the government but not to taxpayers.

ANS: F DIF: 2 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: TaxesMSC: Interpretive

Chapter 12 /The Design of the Tax System 783

23. The equity of a tax system concerns whether the tax burden is distributed equally among the population.

ANS: F DIF: 2 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: TaxesMSC: Interpretive

24. An efficient tax system is one that imposes small deadweight losses and small administrative burdens.


25. Deadweight losses arise because a tax causes some individuals to change their behavior.

ANS: T DIF: 2 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Deadweight lossesMSC: Interpretive

26. If a tax generates a reduction in surplus that is exactly offset by the tax revenue collected by the government, the tax does not have a deadweight loss.

ANS: T DIF: 2 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Deadweight lossesMSC: Analytical

27. Resources devoted to complying with the tax laws are a type of deadweight loss.

ANS: T DIF: 2 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Deadweight lossesMSC: Applicative

28. An advantage of a consumption tax is that it does not distort the incentive to save.

ANS: T DIF: 2 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Consumption taxesMSC: Interpretive

29. Tax evasion is legal, but tax avoidance is illegal.

ANS: F DIF: 1 REF: 12-2NAT: Analytic LOC: The study of economics, and definitions of economicsTOP: Income taxes MSC: Applicative

30. Tax evasion is illegal, but tax avoidance is legal.

ANS: T DIF: 1 REF: 12-2NAT: Analytic LOC: The study of economics, and definitions of economicsTOP: Income taxes MSC: Applicative

31. In practice, the U.S. income tax system is filled with special provisions that alter a family's tax based on its specific circumstances.

ANS: T DIF: 1 REF: 12-2NAT: Analytic LOC: The role of government TOP: Income taxesMSC: Applicative

32. If Christopher earns $80,000 in taxable income and pays $20,000 in taxes, his average tax rate is 20 percent.

ANS: F DIF: 2 REF: 12-2NAT: Analytic LOC: The study of economics, and definitions of economicsTOP: Average tax rate MSC: Analytical

33. If James earns $80,000 in taxable income and pays $20,000 in taxes, his average tax rate is 25 percent.

ANS: T DIF: 2 REF: 12-2NAT: Analytic LOC: The study of economics, and definitions of economicsTOP: Average tax rate MSC: Analytical

34. If Mary earns $80,000 in taxable income and pays $40,000 in taxes, her marginal tax rate must be 50 percent.

ANS: F DIF: 2 REF: 12-2NAT: Analytic LOC: The study of economics, and definitions of economicsTOP: Marginal tax rate MSC: Analytical


35. Many people consider lump-sum taxes to be unfair to low-income taxpayers.

ANS: T DIF: 1 REF: 12-2NAT: Analytic LOC: The role of government TOP: Lump-sum taxesMSC: Interpretive

36. Lump-sum taxes are equitable but not efficient.

ANS: F DIF: 2 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Lump-sum taxesMSC: Interpretive

37. A lump-sum tax minimizes deadweight loss.

ANS: T DIF: 2 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Lump-sum taxesMSC: Interpretive

38. Deadweight losses and administrative burdens are key factors considered when determining the efficiency of the tax system.

ANS: T DIF: 1 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: EfficiencyMSC: Interpretive

39. When the total surplus lost as a result of a tax is less than the amount of tax revenue collected by the government there is a deadweight loss.

ANS: F DIF: 2 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Deadweight lossesMSC: Interpretive

40. The marginal tax rate serves as a measure of the extent to which the tax system discourages people from working.

ANS: T DIF: 2 REF: 12-2NAT: Analytic LOC: The role of government TOP: Marginal tax ratesMSC: Interpretive

41. Most economists believe that a corporate income tax affects the stockholders of a corporation but not its employees or customers.

ANS: F DIF: 2 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Corporate income taxMSC: Interpretive

42. Antipoverty programs funded by taxes on the wealthy are sometimes advocated on the basis of the benefits principle.

ANS: T DIF: 1 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Benefits principleMSC: Applicative

43. According to the benefits principle, it is fair for people to pay taxes based on the benefits they receive from the government.

ANS: T DIF: 1 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Benefits principleMSC: Definitional

44. According to the benefits principle, it is fair for people to pay taxes based on their ability to shoulder the tax burden.

ANS: F DIF: 1 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Benefits principleMSC: Definitional


45. According to the ability-to-pay principle, it is fair for people to pay taxes based on the amount of government services that they receive.

ANS: F DIF: 1 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Ability-to-pay principleMSC: Definitional

46. According to the ability-to-pay principle, it is fair for people to pay taxes based on their ability to handle the financial burden.

ANS: T DIF: 1 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Ability-to-pay principleMSC: Definitional

47. If all taxpayers pay the same percentage of income in taxes, the tax system is progressive.

ANS: F DIF: 1 REF: 12-3NAT: Analytic LOC: The study of economics, and definitions of economicsTOP: Progressive taxes MSC: Definitional

48. If all taxpayers pay the same percentage of income in taxes, the tax system is proportional.

ANS: T DIF: 1 REF: 12-3NAT: Analytic LOC: The study of economics, and definitions of economicsTOP: Proportional taxes MSC: Definitional

49. Vertical equity refers to a tax system in which individuals with higher incomes pay more in taxes than individuals with lower incomes.

ANS: T DIF: 1 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Vertical equityMSC: Definitional

50. Vertical equity refers to a tax system in which individuals with similar incomes pay similar taxes.

ANS: F DIF: 1 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Vertical equityMSC: Definitional

51. Vertical equity is not consistent with a regressive tax structure.

ANS: F DIF: 2 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Vertical equityMSC: Interpretive

52. Horizontal equity refers to a tax system in which individuals with higher incomes pay more in taxes than individuals with lower incomes.

ANS: F DIF: 1 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Horizontal equityMSC: Definitional

53. Horizontal equity refers to a tax system in which individuals with similar incomes pay similar taxes.

ANS: T DIF: 1 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Horizontal equityMSC: Definitional

54. Horizontal and vertical equity are the two primary measures of efficiency of a tax system.

ANS: F DIF: 1 REF: 12-3NAT: Analytic LOC: The study of economics, and definitions of economicsTOP: Equity MSC: Definitional

55. A tax system exhibits vertical equity when taxpayers with similar abilities to pay contribute the same amount.

ANS: F DIF: 1 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Tax equityMSC: Definitional


56. To fully understand the progressivity of government policies, one should only look at the proportion of total income that individuals pay in taxes each year.


57. In a regressive tax system, it is impossible for individuals with higher incomes to pay more in taxes than individuals with lower incomes.


58. If the rich pay more in taxes than the poor, the tax system must be progressive.


SHORT ANSWER

1. List the three most important expenditure programs of the federal government. How do they differ from the three most important expenditure programs of state and local governments? Explain why it makes more sense for the federal government to purchase "national defense" rather than state governments.

ANS:The three most important expenditure programs of the federal government are Social Security, national defense, and Medicare. The three most important expenditure programs of state and local government are education, public welfare, and highways. It makes sense for the federal government to purchase national defense because national defense is a public good; as such, the federal government can minimize the free-rider problem among states.

DIF: 2 REF: 12-1 TOP: Government spendingMSC: Interpretive

2. A recent increase in federal gasoline taxes was estimated to cause a $150 million reduction in the total surplus (consumer plus producer surplus) in the gasoline market. If tax revenues increased by $100 million, what is the deadweight loss associated with the tax? As a result of the tax, 10,000 people sold their cars and started riding their bicycles to work. How much of the burden of the deadweight loss is incurred by the bicycle riders?

ANS:The direct deadweight loss is $50 million. It is impossible to determine how much of the loss is borne by bicycle riders without more information. For example, some of the deadweight loss may be attributable to walkers or people who switched to public transportation.

DIF: 2 REF: 12-2 TOP: Deadweight lossesMSC: Analytical


3. Use Table A to complete Table B.

TABLE AOn Taxable Income The Tax Rate IsUp to $27,050 15.0%From $27,051 to $65,550 27.5%From $65,551 to $136,750 30.5%From $136,751 to $297,350 35.5%Over $297,350 39.1%

TABLE BTaxpayer Income Tax Amount Average Tax RateJohn $52,700Todd $132,500Glen $237,000Jake $315,250

ANS:Taxpayer Income Tax Amount Average Tax RateJohn $52,700 $11,111.25 21%Todd $132,500 $35,064.75 26%Glen $237,000 $71,949.75 30%Jake $315,250 $100,372.90 32%

DIF: 3 REF: 12-2 TOP: TaxesMSC: Analytical

Sec00 - The Design of the Tax System

MULTIPLE CHOICE

1. From the time of Benjamin Franklin to the present, the percentage of the average American’s income that goes to pay taxesa. has decreased from about 20 percent to about 10 percent.b. has remained constant at about 10 percent.c. has risen from less than 2 percent to about 44.4 percent.d. has risen from less than 5 percent to about 33.3 percent.

ANS: D DIF: 1 REF: 12-0NAT: Analytic LOC: The role of government TOP: TaxesMSC: Definitional

2. Today the typical American pays approximately what percent of income in taxes, including all federal, state, and local taxes?a. 5 percentb. 18 percentc. 33 percentd. 50 percent

ANS: C DIF: 1 REF: 12-0NAT: Analytic LOC: The role of government TOP: TaxesMSC: Applicative


3. Which of the following statements is correct?a. Equity is more important than efficiency as a goal of the tax system.b. Efficiency is more important than equity as a goal of the tax system.c. Both equity and efficiency are important goals of the tax system.d. Neither equity nor efficiency is an important goal of the tax system.

ANS: C DIF: 1 REF: 12-0NAT: Analytic LOC: Efficiency and equity TOP: TaxesMSC: Interpretive

4. Who observed that "in this world nothing is certain but death and taxes"?a. Mark Twainb. P.T. Barnumc. Ben Franklind. Richard Nixon

ANS: C DIF: 1 REF: 12-0NAT: Analytic LOC: The study of economics, and definitions of economicsTOP: Taxes MSC: Applicative

5. In 1789, the average American paid approximately what percent of income in taxes?a. 5%b. 15%c. 33%d. 50%

ANS: A DIF: 1 REF: 12-0NAT: Analytic LOC: The role of government TOP: Tax burdenMSC: Applicative

Sec01 - The Design of the Tax System - A Financial Overview of the US Government

MULTIPLE CHOICE

1. In 2007, which category represented the largest source of receipts for the U.S. federal government?a. Medicareb. Social Securityc. Corporate income taxesd. Individual income taxes

ANS: D DIF: 2 REF: 12-1NAT: Analytic LOC: The role of government TOP: TaxesMSC: Interpretive

2. In 2007, approximately what percentage of federal government receipts came from individual income taxes?a. 15%b. 30%c. 45%d. 60%

ANS: C DIF: 2 REF: 12-1NAT: Analytic LOC: The role of government TOP: TaxesMSC: Interpretive


3. In 2007, which category represented the largest category of spending for the U.S. federal government?a. Medicareb. Social Securityc. National defensed. Net interest

ANS: B DIF: 2 REF: 12-1NAT: Analytic LOC: The role of government TOP: Government spendingMSC: Interpretive

4. In 2007, approximately how much of federal government spending went to Social Security?a. 10%b. 20%c. 30%d. 40%


5. Which of the following is not an important reason for the projected increase in government spending as a percentage of GDP over the next several decades?a. The increase in life expectancy resulting from advances in healthcareb. A reduction in the average number of children per family.c. The increase in the number of jobs lost each year to foreign countries as a result of outsourcingd. The increase in the cost of healthcare

ANS: C DIF: 2 REF: 12-1NAT: Analytic LOC: The role of government TOP: Government spendingMSC: Interpretive

6. The U.S. federal government collects abouta. one-third of the taxes in our economy.b. one-half of the taxes in our economy.c. two-thirds of the taxes in our economy.d. three-fourths of the taxes in our economy.

ANS: C DIF: 1 REF: 12-1NAT: Analytic LOC: The role of government TOP: TaxesMSC: Definitional

7. Of the following countries, which country’s government collects the largest amount of tax revenue as a percentage of that country’s total income?a. Franceb. United Statesc. Canadad. Sweden

ANS: D DIF: 1 REF: 12-1NAT: Analytic LOC: The role of government TOP: Taxes | IncomeMSC: Definitional

8. The two taxes that together provide the U.S. federal government with approximately 80 percent of its revenue are a. individual income taxes and property taxes.b. individual income taxes and corporate income taxes.c. individual income taxes and payroll taxes.d. sales taxes and payroll taxes.

ANS: C DIF: 2 REF: 12-1NAT: Analytic LOC: The role of governmentTOP: Individual income taxes | Payroll taxes MSC: Definitional


9. The revenue that the federal government collects from payroll taxes is earmarked to pay fora. National defense and income security (welfare) programsb. National defense and Medicarec. Social Security and public schoolsd. Social Security and Medicare

ANS: D DIF: 1 REF: 12-1NAT: Analytic LOC: The role of government TOP: Payroll taxesMSC: Definitional

10. The federal taxes owed by a taxpayer depend a. only upon the marginal tax rate on the taxpayer’s first $25,000 of income.b. only upon the marginal tax rate on the taxpayer’s last $10,000 of income.c. upon all the marginal tax rates up to the taxpayer’s overall level of income.d. upon all the marginal tax rates, including those for income levels that exceed the taxpayer’s overall

level of income.

ANS: C DIF: 2 REF: 12-1NAT: Analytic LOC: The role of government TOP: Marginal tax ratesMSC: Interpretive

11. Taxes on specific goods such as gasoline and alcoholic beverages are calleda. excise taxes.b. payroll taxes.c. sales taxes.d. social insurance taxes.

ANS: A DIF: 1 REF: 12-1NAT: Analytic LOC: The study of economics, and definitions of economicsTOP: Excise taxes MSC: Definitional

12. The concept of a “welfare program” is most closely associated with which particular federal government program?a. Spending on medical researchb. Temporary Assistance for Needy Families (TANF)c. Medicared. Social Security

ANS: B DIF: 2 REF: 12-1NAT: Analytic LOC: The role of government TOP: WelfareMSC: Interpretive

13. According to long-run projections, under current law,a. federal government spending as a percentage of GDP will rise gradually but substantially in the

next several decades.b. federal taxes as a percentage of GDP will rise gradually but substantially in the next several

decades.c. the federal government’s budget deficit will gradually be eliminated in the next several decades.d. All of the above are correct.

ANS: A DIF: 2 REF: 12-1NAT: Analytic LOC: The role of governmentTOP: Government spending | Taxes | Budget deficits MSC: Interpretive

14. The two types of taxes that are most important to state and local governments as sources of revenue area. individual income taxes and corporate income taxes.b. sales taxes and individual income taxes.c. sales taxes and property taxes.d. social insurance taxes and property taxes.

ANS: C DIF: 2 REF: 12-1NAT: Analytic LOC: The role of government TOP: Sales taxes | Property taxesMSC: Definitional


15. By far, the largest single expenditure item for state and local governments is fora. highways.b. police and fire protection.c. transfer payments to poor people.d. education.

ANS: D DIF: 1 REF: 12-1NAT: Analytic LOC: The role of government TOP: State governmentMSC: Definitional

16. The largest source of income for the federal government isa. individual income taxes.b. corporate taxes.c. tariffs.d. “sin” taxes on alcohol and cigarettes.

ANS: A DIF: 1 REF: 12-1NAT: Analytic LOC: The role of government TOP: TaxesMSC: Applicative

17. The largest source of revenue for the federal government is thea. individual income tax.b. property tax.c. sales tax.d. corporate income tax.


18. The U.S. federal government collects approximately what percentage of the taxes in the economy?a. 10%b. 40%c. 50%d. 67%

ANS: D DIF: 1 REF: 12-1NAT: Analytic LOC: The role of government TOP: TaxesMSC: Applicative

19. In 2007, the average American paid approximately how much to the federal government in taxes?a. $1,900b. $4,500c. $6,400d. $8,500


20. Approximately what percentage of the U.S. federal government's receipts come from individual income taxes?a. 8%b. 15%c. 45%d. 67%



21. A person's tax liability refers toa. the percentage of income that a person must pay in taxes.b. the amount of tax a person owes to the government.c. the amount of tax the government is required to refund to each person.d. deductions that can be legally subtracted from a person's income each year.

ANS: B DIF: 1 REF: 12-1NAT: Analytic LOC: The study of economics, and definitions of economicsTOP: Taxes MSC: Applicative

22. Which of the following is not a cost of taxes to taxpayers?a. The tax payment itselfb. Deadweight lossesc. Administrative burdensd. Goods and services provided by the government


23. Which of the following is true about the percent of total income all levels of government in the U.S. take as taxes?a. In 1902 the government collected about 7 percent of total income. In recent years, it collected

about 30 percent of total income.b. In 1902 the government collected about 30 percent of total income. In recent years, it collected

about 7 percent of total income.c. In 1902 the government collected about 7 percent of total income. In recent years, it collected

about 7 percent of total income.d. In 1902 the government collected about 30 percent of total income. In recent years, it collected

about 30 percent of total income.


24. Which of the following statements is not correct?a. All states have state income taxes, but the percentages vary widely.b. Sales taxes and property taxes are important revenue sources for state and local governments.c. Medicare spending has increased because the percentage of the population that is elderly and the

cost of health care have both increased.d. A budget deficit occurs when government spending exceeds government receipts.


25. Which of the following statements about state income taxes is correct?a. Some states do not tax income at all.b. If states tax income, they must follow federal guidelines for designing the tax structure.c. States are not allowed to have a higher marginal tax rate than the federal marginal tax rate.d. All of the above are correct.



26. The U.S. federal government collects taxes in a number of ways. Rank the following sources of revenue from the largest to the smallest.a. Corporate income taxes, individual income taxes, social insurance taxesb. Social insurance taxes, individual income taxes, corporate income taxesc. Individual income taxes, social insurance taxes, corporate income taxesd. Individual income taxes, corporate income taxes, social insurance taxes


27. Most people agree that the tax systema. should be both efficient and equitable.b. cannot raise enough revenue to cover government expenditures.c. would raise more revenue if tax rates were lowered.d. should be rewritten to require everyone to pay the same percentage of income in taxes.

ANS: A DIF: 2 REF: 12-1NAT: Analytic LOC: Efficiency and equity TOP: TaxesMSC: Interpretive

28. State and local governmentsa. are funded entirely by their own tax base.b. receive the majority of their tax revenues from corporate income taxes.c. are generally not responsible for collecting sales taxes.d. receive some of their funds from the federal government.


29. The amount of income tax owed by a family isa. not simply proportional to its total income.b. unaffected by deductions.c. total income minus tax credits.d. a constant fraction of income.

ANS: A DIF: 2 REF: 12-1NAT: Analytic LOC: The role of government TOP: TaxesMSC: Interpretive

30. State and local governmentsa. use a mix of taxes and fees to generate revenue.b. are required by federal mandate to levy income taxes.c. are required to tax property at a standard rate set by the federal government.d. cannot impose state excise taxes on products that are taxed by the federal government.

ANS: A DIF: 2 REF: 12-1NAT: Analytic LOC: The role of government TOP: TaxesMSC: Interpretive

31. State and local governments generate revenue from all of the following sources except a. sales taxes.b. the federal government.c. corporate income taxes.d. customs duties.



32. Which of the following statements is correct?a. National defense and health care are the two largest spending categories for the federal government.b. Welfare programs and highways are the two largest spending categories for state and local

governments.c. Sales taxes and property taxes are the two most important revenue sources for state and local

governments.d. Corporate income taxes are the largest source of revenue for the federal government.


33. As a nation gets richer, the government typically takes a. a constant share of income in taxes.b. a smaller share of income in taxes.c. a larger share of income in taxes.d. There is little evidence of a relationship between income and taxes for most countries.

ANS: C DIF: 1 REF: 12-1NAT: Analytic LOC: The role of government TOP: Tax burdenMSC: Applicative

34. Which of the following countries has the largest tax burden?a. Brazilb. Germanyc. United Statesd. Sweden

ANS: D DIF: 1 REF: 12-1NAT: Analytic LOC: The role of government TOP: Tax burdenMSC: Applicative

35. Compared to most European countries, the U.S. tax burden isa. about the same as most European countries.b. higher than most European countries.c. lower than most European countries.d. higher than all European countries.


36. When compared to nonpoor countries, poor countries usually havea. very high tax burdens.b. similar tax burdens.c. relatively low tax burdens.d. no taxes because of high poverty levels.


37. Which of the following statements is not correct?a. The U.S. tax burden is high compared to many poor countries.b. As nations get richer, their governments typically collect a smaller share of income in taxes.c. The U.S. has a higher federal tax burden than China and India.d. The U.S. tax burden is low compared to many European countries.

ANS: B DIF: 2 REF: 12-1NAT: Analytic LOC: The role of government TOP: Tax burdenMSC: Interpretive


38. Over the past 100 years, as the U.S. economy's income has grown,a. tax rates have decreased, while tax revenues have increased.b. tax rates have increased, while tax revenues have decreased.c. both tax rates and tax revenues have increased.d. both tax rates and tax revenues have decreased.


39. Which of the following statements is correct?a. The U.S. federal government collected a higher percentage of income in taxes in the early 1900s

than in the early 2000s.b. The U.S. federal government collects a higher percentage of income in taxes than many European

countries, including France and Germany.c. The U.S. federal government collects a lower percentage of income in taxes than many developing

countries, including Mexico and India.d. The U.S. federal government collects a similar percentage of income in taxes as Brazil and Japan.

ANS: D DIF: 2 REF: 12-1NAT: Analytic LOC: The role of government TOP: Tax ratesMSC: Applicative

40. Corporate profits distributed as dividends area. tax free.b. taxed once.c. taxed twice.d. taxed three times.

ANS: C DIF: 1 REF: 12-1NAT: Analytic LOC: The role of government TOP: Corporate income taxMSC: Applicative

41. The government taxes corporate income on the basis ofa. profit.b. the amount the firm receives for the goods or services it sells.c. the number of employees.d. All of the above are correct.

ANS: A DIF: 2 REF: 12-1NAT: Analytic LOC: The role of government TOP: Corporate income taxMSC: Definitional

42. Corporate profits area. included in payroll taxes.b. exempt from taxes.c. taxed twice, once as profit and once as dividends.d. taxed to pay for Medicare.

ANS: C DIF: 2 REF: 12-1NAT: Analytic LOC: The role of government TOP: Corporate income taxMSC: Applicative

43. In the United States, the payroll tax is also called aa. dividend income tax.b. social insurance tax.c. value added tax.d. capital gains tax.

ANS: B DIF: 1 REF: 12-1NAT: Analytic LOC: The study of economics, and definitions of economicsTOP: Payroll taxes MSC: Definitional


44. Which type of tax is used to finance the Social Security program in the United States?a. Consumption taxb. Income taxc. Payroll taxd. Property tax

ANS: C DIF: 1 REF: 12-1NAT: Analytic LOC: The role of government TOP: Payroll taxesMSC: Definitional

45. A payroll tax is a tax ona. the wages that a firm pays its workers.b. earned and unearned income.c. specific goods like gasoline and cigarettes.d. corporate profits.

ANS: A DIF: 1 REF: 12-1NAT: Analytic LOC: The study of economics, and definitions of economicsTOP: Payroll taxes MSC: Definitional

46. In 2007, social insurance taxes represented approximately what percentage of total receipts for the federal government?a. 15%b. 25%c. 35%d. 45%

ANS: C DIF: 1 REF: 12-1NAT: Analytic LOC: The role of government TOP: Payroll taxesMSC: Applicative

47. The payroll tax differs from the individual income tax because the payroll tax is primarily earmarked to pay fora. employer-provided pensions.b. Social Security and Medicare.c. employer-provided health benefits.d. job loss and training programs.

ANS: B DIF: 1 REF: 12-1NAT: Analytic LOC: The role of government TOP: Payroll taxesMSC: Definitional

48. A tax on the wages that a firm pays its workers is called a. an income tax.b. an excise tax.c. a consumption tax.d. a payroll tax.

ANS: D DIF: 1 REF: 12-1NAT: Analytic LOC: The study of economics, and definitions of economicsTOP: Payroll taxes MSC: Definitional

49. If Nebraska imposed a tax on milk of 10 cents per gallon, it woulda. be an excise tax.b. be an income tax.c. reduce tax revenue.d. cause the supply of milk to rise.

ANS: A DIF: 1 REF: 12-1NAT: Analytic LOC: The role of government TOP: Excise taxesMSC: Definitional


50. Taxes on specific goods such as cigarettes, gasoline, and alcoholic beverages are calleda. sales taxes.b. excise taxes.c. social insurance taxes.d. consumption taxes.

ANS: B DIF: 1 REF: 12-1NAT: Analytic LOC: The study of economics, and definitions of economicsTOP: Excise taxes MSC: Definitional

51. A transfer payment is a government paymenta. to companies that provide goods or services to government agencies.b. designed to transfer funds from one government agency to another.c. which transfers revenue from the federal government to state government.d. not made in exchange for a good or service.

ANS: D DIF: 1 REF: 12-1NAT: Analytic LOC: The study of economics, and definitions of economicsTOP: Transfer payments MSC: Definitional

52. A budget deficita. occurs when government receipts are less than spending.b. occurs when government spending is less than receipts.c. occurs when government receipts are equal to spending.d. is the accumulation of years of government overspending.

ANS: A DIF: 1 REF: 12-1NAT: Analytic LOC: The study of economics, and definitions of economicsTOP: Budget deficits MSC: Definitional

53. The U.S. federal government finances budget deficits bya. selling stock, much like a corporation.b. printing additional currency.c. borrowing from the public.d. raising property taxes.

ANS: C DIF: 1 REF: 12-1NAT: Analytic LOC: The role of government TOP: Budget deficitsMSC: Applicative

54. Suppose that in 2015 the average citizen's federal tax bill is $10,277, and total federal spending is $9,973 per person. In 2015, the federal government will havea. a budget surplus.b. a budget deficit.c. horizontal equity.d. vertical equity.

ANS: A DIF: 2 REF: 12-1NAT: Analytic LOC: The role of government TOP: Budget deficitsMSC: Analytical

55. The government finances the budget deficit bya. borrowing from the public.b. borrowing solely from the Federal Reserve Bank.c. printing currency in the amount of the budget deficit.d. requiring that budget surpluses occur every other year to pay off the deficits.

ANS: A DIF: 2 REF: 12-1NAT: Analytic LOC: The role of government TOP: Budget deficitsMSC: Applicative


56. Which of the following contributes to the projected rise in government spending on Social Security and Medicare as a percentage of GDP?a. Increasing life expectanciesb. Falling fertility ratesc. Increasing health care costsd. All of the above are correct.

ANS: D DIF: 2 REF: 12-1NAT: Analytic LOC: The study of economics, and definitions of economicsTOP: Budget deficits MSC: Applicative

57. From 1950 to today, government spending on Social Security, Medicare, and Medicaid as a percentage of GDP has a. decreased from about eight percent to less than one percent.b. increased from less than one percent to about eight percent.c. remained constant at less than one percent.d. remained constant at about eight percent.

ANS: B DIF: 2 REF: 12-1NAT: Analytic LOC: The role of government TOP: Budget deficitsMSC: Applicative

58. Most health care economists believe that it will be very difficult to stem the rise in health care costs because a. government intervention is unpopular with most citizens, especially the elderly.b. improvements in medical technology have not kept pace with technological improvements in other

sectors of the economy.c. increased competition will increase rather than reduce costs.d. medical advances are providing better ways to extend and improve human lives but at high costs.

ANS: D DIF: 2 REF: 12-1NAT: Analytic LOC: The study of economics, and definitions of economicsTOP: Budget deficits MSC: Applicative

59. When government receipts exceed total government spending during a fiscal year, the difference is a. a budget surplus.b. a budget deficit.c. the national debt.d. automatically refunded.

ANS: A DIF: 1 REF: 12-1NAT: Analytic LOC: The study of economics, and definitions of economicsTOP: Budget surpluses MSC: Definitional

60. Suppose that in 2015 the average citizen's federal tax bill is $12,172, and total federal spending is $13,187 per person. In 2015, the federal government will havea. a budget surplus.b. a budget deficit.c. horizontal equity.d. vertical equity.

ANS: B DIF: 2 REF: 12-1NAT: Analytic LOC: The study of economics, and definitions of economicsTOP: Budget surpluses MSC: Analytical

61. A family's income tax liability isa. a standard percentage of all income earned.b. determined by wage income rather than dividend and interest income.c. based on total income.d. constant from year to year.

ANS: C DIF: 1 REF: 12-1NAT: Analytic LOC: The role of government TOP: Income taxesMSC: Definitional


Table 12-1

On Taxable Income ... The Tax Rate is ...Up to $7,000 10%From $7,000 to $30,000 15From $30,000 to $76,000 25From $76,000 to $168,000 28From $168,000 to $352,000 33Over $352,000 35

62. Refer to Table 12-1. If Andrea has $85,000 in taxable income, her tax liability is a. $12,750.b. $18,170.c. $21,250.d. $23,800.

ANS: B DIF: 3 REF: 12-1NAT: Analytic LOC: The role of government TOP: Income taxesMSC: Analytical

63. Refer to Table 12-1. If Andrea has $85,000 in taxable income, her average tax rate isa. 19.7%.b. 20.3%.c. 21.4%.d. 22.6%.

ANS: C DIF: 3 REF: 12-1NAT: Analytic LOC: The role of government TOP: Income taxesMSC: Analytical

64. Refer to Table 12-1. If Andrea has $85,000 in taxable income, her marginal tax rate isa. 15%.b. 25%.c. 28%.d. 33%.


65. Refer to Table 12-1. If Barb has $126,000 in taxable income, her tax liability will be a. $27,940.b. $28,270.c. $29,650.d. $35,280.


66. Refer to Table 12-1. If Barb has $126,000 in taxable income, her average tax rate isa. 21.7%.b. 22.2%.c. 22.9%.d. 23.5%.

ANS: D DIF: 3 REF: 12-1NAT: Analytic LOC: The role of government TOP: Income taxesMSC: Analytical


67. Refer to Table 12-1. If Barb has $126,000 in taxable income, her marginal tax rate isa. 25%.b. 28%.c. 33%.d. 35%.


68. Refer to Table 12-1. If Celeste has $47,000 in taxable income, her tax liability will be a. $6,900.b. $7,600.c. $8,400.d. $11,750.


69. Refer to Table 12-1. If Celeste has $47,000 in taxable income, her average tax rate is a. 16.8%.b. 17.9%.c. 18.3%.d. 19.4%.


70. Refer to Table 12-1. If Celeste has $47,000 in taxable income, her marginal tax rate is a. 10%.b. 15%.c. 25%.d. 28%.


71. A tax levied on the total amount spent in retail stores is called a. a sales tax.b. an excise tax.c. a retail tax.d. an income tax.

ANS: A DIF: 1 REF: 12-1NAT: Analytic LOC: The study of economics, and definitions of economicsTOP: Sales taxes MSC: Applicative

72. The tax that generates the most revenue for state and local government is thea. corporate income tax.b. individual income tax.c. property tax.d. sales tax.

ANS: D DIF: 1 REF: 12-1NAT: Analytic LOC: The role of government TOP: Sales taxesMSC: Applicative


73. When a state levies a sales tax, the taxa. is paid only by the state's residents.b. occasionally excludes items that are deemed to be necessities.c. is commonly levied on labor services.d. applies to wholesale purchases but not retail purchases.

ANS: B DIF: 1 REF: 12-1NAT: Analytic LOC: The role of government TOP: Sales taxesMSC: Applicative

74. State and local governments receive the largest portion of their tax revenues froma. sales taxes and income taxes.b. income taxes and property taxes.c. payroll taxes and income taxes.d. property taxes and sales taxes.

ANS: D DIF: 2 REF: 12-1NAT: Analytic LOC: The role of government TOP: Property taxes | Sales taxesMSC: Applicative

75. For state and local governments, sales taxes and property taxes make up approximately a. 17 percent of all receipts.b. 20 percent of all receipts.c. 36 percent of all receipts.d. 57 percent of all receipts.

ANS: C DIF: 2 REF: 12-1NAT: Analytic LOC: The role of government TOP: Sales taxes | Property taxesMSC: Applicative

76. All of the following are transfer payments excepta. Medicaid.b. unemployment compensation.c. personal income taxes.d. Food Stamps.

ANS: C DIF: 1 REF: 12-1NAT: Analytic LOC: The role of government TOP: Government spendingMSC: Definitional

77. Temporary Assistance for Needy Families (TANF) falls into which spending category?a. Medicareb. Income securityc. Guaranteed social eligibilityd. Social Security

ANS: B DIF: 1 REF: 12-1NAT: Analytic LOC: The role of government TOP: Government spendingMSC: Applicative

78. The single largest expenditure by state and local governments is ona. highways.b. police.c. public welfare.d. education.

ANS: D DIF: 1 REF: 12-1NAT: Analytic LOC: The role of government TOP: Government spendingMSC: Applicative


79. For state and local governments, education accounts for approximately what percentage of spending?a. 25 percentb. 34 percentc. 50 percentd. 75 percent


80. As the economy's income has grown, the government hasa. grown at about the same pace.b. grown at a faster pace.c. grown at a slower pace.d. shrunk.


81. Most analysts expect the largest federal spending category to continue to grow in importance for many years into the future. What category of spending is this?a. National defenseb. Social Securityc. Income securityd. Farm support programs


82. The government's health plan for the elderly is calleda. Medicaid.b. Medicare.c. Social Security.d. TANF.

ANS: B DIF: 1 REF: 12-1NAT: Analytic LOC: The study of economics, and definitions of economicsTOP: Government spending MSC: Applicative

83. Medicare is thea. government's health plan for the elderly.b. government's health plan for the poor.c. another name for Social Security.d. Both a and c are correct.

ANS: A DIF: 1 REF: 12-1NAT: Analytic LOC: The study of economics, and definitions of economicsTOP: Government spending MSC: Applicative

84. The federal healthcare spending program that specifically targets the poor is calleda. Medicaid.b. Medicare.c. National Institutes of Health.d. Blue Cross/Blue Shield.

ANS: A DIF: 1 REF: 12-1NAT: Analytic LOC: The study of economics, and definitions of economicsTOP: Government spending MSC: Applicative


85. Medicaid is a. the government's health plan for the elderly.b. the government's health plan for the poor.c. another name for Social Security.d. Both a and c are correct.

ANS: B DIF: 1 REF: 12-1NAT: Analytic LOC: The study of economics, and definitions of economicsTOP: Government spending MSC: Applicative

86. State and local government spending on public welfare includesa. trash removal.b. transfer payments to the poor.c. libraries.d. road repairs.


87. Public schools, which educate most students through high school, are paid for primarily bya. state governments.b. local governments.c. the federal government.d. taxpayers directly.


88. The most common explanation for Social Security payments accounting for a larger share of federal government expenditures isa. increases in life expectancy.b. people becoming eligible for Social Security benefits at an earlier age.c. increases in birth rates among teenagers and the poor.d. falling payroll tax receipts.

ANS: A DIF: 2 REF: 12-1NAT: Analytic LOC: The role of government TOP: Government spendingMSC: Applicative

89. Which of the following is not true about government spending on national defense?a. It is the second-largest spending category for the U.S. federal government.b. It includes salaries of military personnel.c. It fluctuates over time as the political climate changes.d. It is not financed with tax revenue.


90. As government debt increases,a. Congress will reduce spending by an equal proportion.b. the government must spend more revenue on interest payments.c. a trade-off with government deficits is inevitable.d. tax rates must rise to cover the deficit.



91. The U.S. federal government spends its revenues in a number of ways. Rank the following spending categories from largest to smallest.a. Social Security, national defense, income security, net interestb. Health care, national defense, net interest, income securityc. Social Security, health care, national defense, Medicared. National defense, Social Security, net interest, income security


92. The three largest categories of spending by the Federal government in order from first to third would bea. Social Security, Medicare, and national defense.b. National defense, net interest, and Social Security.c. Social Security, national defense, and Medicare.d. Income security, Social Security, and national defense.

ANS: C DIF: 2 REF: 12-1NAT: Analytic LOC: The role of government TOP: Government spendingMSC: Applicative

93. Specific spending programs that are included under the general category of income security includea. health programs.b. Medicare.c. Social Security.d. Food Stamps.


94. Like spending on Social Security, the share of federal government spending on Medicare has risen substantially over time. This is most likely a result ofa. a rising population of poor in the economy.b. the elderly population growing more rapidly than the overall population.c. an immigration policy that promotes an influx of migrant farm workers.d. All of the above are important factors.


95. Medicare has been the focus of many proposed reforms over the last several years becausea. health care costs have risen more rapidly than the cost of other goods and services produced in the

economy.b. nationalized health care systems are more efficient than private health care systems.c. cures for many major diseases are likely to be found in the next few years.d. government health care research has found that limiting access to doctors will increase the general

health of the population.

ANS: A DIF: 2 REF: 12-1NAT: Analytic LOC: The role of government TOP: Government spendingMSC: Interpretive

96. Rank the following state and local government expenditure categories from largest to smallest.a. Education, public welfare, highwaysb. Education, highways, public welfarec. Highways, education, public welfared. Public welfare, education, highways



97. The public welfare spending category for state and local governments includesa. many programs that are initiated by private foundations.b. contributions in support of public universities.c. some federal programs that are administered by state and local governments.d. All of the above are correct.

ANS: C DIF: 2 REF: 12-1NAT: Analytic LOC: The role of government TOP: Government spendingMSC: Applicative

98. Among the major spending categories for state and local governments, which of the following statements is correct?a. The biggest single expenditure is education.b. The public welfare category does not include the costs of administering some federal programs.c. As a general rule, spending on public schools and public universities exceeds that spent on all other

services combined.d. Local services such as libraries, police, trash removal, fire protection, and park maintenance, are a

very small share of expenditures overall.

ANS: A DIF: 2 REF: 12-1NAT: Analytic LOC: The role of government TOP: Government spendingMSC: Interpretive

99. The largest category of federal government spending is growing becausea. the U.S. must spend more on national defense due to the war against terror.b. the elderly population is increasing due to rising life expectancies.c. expenditures on space exploration have increased dramatically.d. health care costs are rising faster than any other service in the U.S.


Table 12-2Consider the tax rates shown in the table below.

Tax Rate Income Range8% 0 - 10,00014% 10,000 - 30,00026% 30,000 - 70,00031% 70,000 - 150,00034% 150,000 - 310,00036% over 310,000

100. Refer to Table 12-2. If John has taxable income of $72,000, his tax liability isa. $13,720.b. $14,620.c. $22,320.d. $23,470.

ANS: B DIF: 2 REF: 12-1NAT: Analytic LOC: The role of government TOP: TaxesMSC: Analytical

101. Refer to Table 12-2. If John has taxable income of $72,000, his average tax rate isa. 20.3%.b. 20.9%.c. 21.4%.d. 22.2%.

ANS: A DIF: 2 REF: 12-1NAT: Analytic LOC: The role of government TOP: TaxesMSC: Analytical


102. Refer to Table 12-2. If John has taxable income of $72,000, his marginal tax rate isa. 14%.b. 26%.c. 31%.d. 34%.

ANS: C DIF: 2 REF: 12-1NAT: Analytic LOC: The role of government TOP: TaxesMSC: Analytical

103. Refer to Table 12-2. If Max has taxable income of $227,000, his tax liability isa. $57,220.b. $60,870.c. $64,980.d. $68,770.


104. Refer to Table 12-2. If Max has taxable income of $227,000, his average tax rate isa. 15.7%.b. 26.8%.c. 27.8%.d. 28.6%.

ANS: D DIF: 2 REF: 12-1NAT: Analytic LOC: The role of government TOP: TaxesMSC: Analytical

105. Refer to Table 12-2. If Max has taxable income of $227,000, his marginal tax rate isa. 26%.b. 31%.c. 34%.d. 36%.


Sec02 - The Design of the Tax System - Taxes and Efficiency

MULTIPLE CHOICE

1. Suppose a country imposes a lump-sum income tax of $5,000 on each individual in the country. What is the marginal income tax rate for an individual who earns $40,000 during the year?a. 0%b. 10%c. More than 10%d. The marginal tax rate cannot be determined without knowing the entire tax schedule.

ANS: A DIF: 2 REF: 12-2NAT: Analytic LOC: The role of government TOP: Marginal tax ratesMSC: Analytical


2. Suppose a country imposes a lump-sum income tax of $5,000 on each individual in the country. What is the average income tax rate for an individual who earns $40,000 during the year?a. 0%b. 10%c. More than 10%d. The average tax rate cannot be determined without knowing the entire tax schedule.

ANS: C DIF: 2 REF: 12-2NAT: Analytic LOC: The role of government TOP: Average tax ratesMSC: Analytical

3. Country A’s tax system is more efficient than Country B’s tax system ifa. Country A collects less tax revenue than Country B, and the cost to taxpayers is the same in both

countries.b. Country A collects more tax revenue than Country B, even though the cost to taxpayers is greater in

Country A than in Country B.c. the same amount of revenue is raised in both countries, but the cost to taxpayers is smaller in

Country A than in Country B.d. the same amount of revenue is raised in both countries, but the taxes are collected in a shorter

amount of time in Country A than in Country B.

ANS: C DIF: 2 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Taxes | EfficiencyMSC: Interpretive

4. Because taxes distort incentives, they typically result ina. deadweight losses.b. reductions in consumer surplus.c. reductions in producer surplus.d. All of the above are correct.

ANS: D DIF: 2 REF: 12-2NAT: Analytic LOC: The role of government TOP: Taxes | Deadweight lossesMSC: Interpretive

5. Many economists believe that the U.S. tax system would be made more efficient if the basis of taxation were changed so that people paid taxes, more so than they do now, based ona. their saving rather than their income.b. their spending rather than their income.c. their income rather than their wealth.d. their wealth rather than their spending.

ANS: B DIF: 2 REF: 12-2NAT: Analytic LOC: Efficiency and equityTOP: Consumption taxes | Efficiency MSC: Interpretive

6. Individual Retirement Accounts and 401(k) plans make the current U.S. tax system a. less like European tax systems than it otherwise would be.b. more like a payroll tax than it otherwise would be.c. more like an income tax than it otherwise would be.d. more like a consumption tax than it otherwise would be.

ANS: D DIF: 2 REF: 12-2NAT: Analytic LOC: The role of government TOP: Consumption taxesMSC: Interpretive


7. In addition to tax payments, the two other primary costs that a tax system inevitably imposes on taxpayers are a. deadweight losses and administrative burdens.b. deadweight losses and frustration with the political system.c. administrative burdens and tax-preparation costs.d. administrative burdens and the risk of punishment for failure to comply with tax laws.

ANS: A DIF: 2 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Taxes | EfficiencyMSC: Interpretive

8. The resources that a taxpayer devotes to complying with the tax laws are a type ofa. consumption tax.b. value-added tax.c. deadweight loss.d. producer surplus.

ANS: C DIF: 1 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Deadweight lossesMSC: Interpretive

9. A tax system with little deadweight loss and a small administrative burden would be described as a. equitable.b. communistic.c. capitalistic.d. efficient.

ANS: D DIF: 1 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: TaxesMSC: Interpretive

10. Which of the following is a characteristic of a more efficient tax system?a. The system minimizes deadweight loss.b. The system raises the same amount of revenue at a lower cost.c. The system minimizes administrative burdens.d. All of the above are correct.

ANS: D DIF: 2 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: TaxesMSC: Interpretive

11. Part of the administrative burden of a tax is a. the money people pay to the government in taxes.b. reducing the size of the market because of the tax.c. the hassle of filling out tax forms that is imposed on taxpayers who comply with the tax.d. the cost of administering programs that use tax revenue.

ANS: C DIF: 2 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: TaxesMSC: Applicative

12. In designing a tax system, policymakers have two objectives that are often conflicting. They are a. maximizing revenue and minimizing costs to taxpayers.b. efficiency and minimizing costs to taxpayers.c. efficiency and equity.d. maximizing revenue and reducing the national debt.



13. One tax system is less efficient than another if ita. places a lower tax burden on lower-income families than on higher-income families.b. places a higher tax burden on lower-income families than on higher-income families.c. raises the same amount of revenue at a higher cost to taxpayers.d. raises less revenue at a lower cost to taxpayers.


14. The deadweight loss of a tax isa. the reduction in economic welfare of taxpayers that exceeds the revenue raised by the government.b. the improved efficiency created as people reallocate resources according to the tax incentive rather

than the true costs and benefits.c. the loss in tax revenues.d. Both a and b are correct.

ANS: A DIF: 1 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Deadweight lossesMSC: Definitional

15. Taxes can create deadweight losses because theya. allow the government to fund private goods.b. create administrative burdens as people comply with tax laws.c. allow the government to fund public goods.d. Both b and c are correct.

ANS: B DIF: 1 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Deadweight lossesMSC: Interpretive

16. Taxes create deadweight losses because theya. reduce profits of firms.b. distort incentives.c. cause prices to rise.d. create revenue for the government.

ANS: B DIF: 1 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Deadweight lossesMSC: Applicative

17. An optimal tax is one that minimizes the a. external benefit.b. total deadweight loss from the tax.c. income taxes.d. horizontal equity.


18. Deadweight losses occur in markets in whicha. firms decide to downsize.b. the government imposes a tax.c. profits fall because of low consumer demand.d. equilibrium prices fall.



19. An efficient tax system is one that imposes smalla. deadweight losses and administrative burdens.b. marginal rates and deadweight losses.c. administrative burdens and transfers of money.d. marginal rates and transfers of money.

ANS: A DIF: 2 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Deadweight lossesMSC: Interpretive

20. Deadweight losses represent thea. inefficiency that taxes create.b. shift in benefit from producers to consumers.c. part of consumer and producer surplus that is now revenue to the government.d. loss in profit to producers when quantity demanded falls as a result of higher prices.

ANS: A DIF: 2 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Deadweight lossesMSC: Applicative

21. One reason that deadweight losses are so difficult to avoid is thata. taxes affect the decisions that people make.b. income taxes are not paid by everyone.c. consumption taxes must be universally applied to all commodities.d. the administrative burden is hard to calculate.


22. Deadweight losses are associated witha. taxes that distort the incentives that people face.b. taxes that target expenditures on survivor's benefits for Social Security.c. taxes that have no efficiency losses.d. lump-sum taxes.

ANS: A DIF: 2 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Deadweight lossesMSC: Interpretive

23. When taxes are imposed on a commodity,a. there is never a deadweight loss.b. some consumers alter their consumption by not purchasing the taxed commodity.c. tax revenue will rise by the amount of the tax multiplied by the before-tax level of consumption.d. the taxes do not distort incentives.


24. In the absence of taxes, Janet would prefer to purchase a large sport utility vehicle (SUV). The government has recently decided to place a $10,000 nuisance tax on SUVs. If Janet decides to purchase a small economy car as a result of the tax, which of the following statements is correct?a. Other people who choose to purchase SUVs will incur the cost of the deadweight loss of the tax.b. There are no deadweight losses as long as some people still choose to purchase SUVs.c. In order to determine the magnitude of the deadweight loss, we must add the revenues from the tax

to the loss in Janet’s consumer surplus.d. Janet is worse off, and her loss of welfare is part of the deadweight loss of the tax.

ANS: D DIF: 2 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Deadweight lossesMSC: Interpretive


25. Taxes create deadweight loss when theya. distort behavior.b. cause the price of the product to increase.c. don't raise sufficient government revenue.d. cannot be computed easily.


26. Adam, Barb, and Carli each like to read novels. The current bestseller costs $10. Adam values it at $15, Barb at $13, and Carli at $11. Suppose that if the government taxes books at $2 each, the selling price will rise to $12. A consequence of the tax is thata. consumer surplus shrinks by $4 and tax revenues increase by $6, so there is a deadweight loss of

$2.b. consumer surplus shrinks by $6 and tax revenues increase by $6, so there is no deadweight loss.c. consumer surplus shrinks by $5 and tax revenues increase by $6, so there is no deadweight loss.d. consumer surplus shrinks by $5 and tax revenues increase by $4, so there is a deadweight loss of

$1.

ANS: D DIF: 3 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Deadweight lossesMSC: Analytical

27. Mark, Kerry, Greg, and Carlos each like Chicago Cubs baseball games. The single-game ticket price for an infield box seat is $50. Mark values a ticket at $70, Kerry at $65, Greg at $60, and Carlos at $55. Suppose that if the government taxes tickets at $5 each, the selling price will rise to $55. A consequence of the tax is thata. consumer surplus shrinks by $50 and tax revenues increase by $20, so there is a deadweight loss of

$30.b. consumer surplus shrinks by $30 and tax revenues increase by $20, so there is a deadweight loss of

$10.c. consumer surplus shrinks by $20 and tax revenues increase by $20, so there is no deadweight loss.d. consumer surplus shrinks by $50 and tax revenues increase by $20, so there is no deadweight loss.

ANS: C DIF: 3 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Deadweight lossesMSC: Analytical

28. Stacy places a $20 value on a bottle of wine, and Andrea places a $17 value on it. The equilibrium price for a bottle of wine is $15. How much total consumer surplus do Stacy and Andrea get when each purchases a bottle of wine?a. $1b. $2c. $5d. $7


29. Stacy places a $20 value on a bottle of wine, and Andrea places a $17 value on it. The equilibrium price for a bottle of wine is $15. Suppose the government levies a tax of $3 on each bottle of wine, and the equilibrium price of a bottle of wine increases to $18. How much tax revenue is collected?a. $0b. $2c. $3d. $6



30. Stacy places a $20 value on a bottle of wine, and Andrea places a $17 value on it. The equilibrium price for a bottle of wine is $15. Suppose the government levies a tax of $3 on each bottle of wine, and the equilibrium price of a bottle of wine increases to $18. What is total consumer surplus after the tax is levied?a. $0b. $2c. $5d. $6

ANS: B DIF: 3 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Deadweight lossesMSC: Analytical

31. Stacy places a $20 value on a bottle of wine, and Andrea places a $17 value on it. The equilibrium price for a bottle of wine is $15. Suppose the government levies a tax of $3 on each bottle of wine, and the equilibrium price of a bottle of wine increases to $18. Because total consumer surplus has a. fallen by more than the tax revenue, the tax has a deadweight lossb. fallen by less than the tax revenue, the tax has no dead weight loss.c. fallen by exactly the amount of the tax revenue, the tax has no deadweight loss.d. increased by less than the tax revenue, the tax has a deadweight loss.

ANS: A DIF: 3 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Deadweight lossesMSC: Analytical

32. Stacy places a $20 value on a bottle of wine, and Andrea places a $17 value on it. The equilibrium price for a bottle of wine is $15. Suppose the government levies a tax of $1 on each bottle of wine, and the equilibrium price of a bottle of wine increases to $16. How much tax revenue is collected?a. $0b. $1c. $2d. $4


33. Stacy places a $20 value on a bottle of wine, and Andrea places a $17 value on it. The equilibrium price for a bottle of wine is $15. Suppose the government levies a tax of $1 on each bottle of wine, and the equilibrium price of a bottle of wine increases to $16. What is total consumer surplus after the tax is levied?a. $2b. $3c. $4d. $5


34. Stacy places a $20 value on a bottle of wine, and Andrea places a $17 value on it. The equilibrium price for a bottle of wine is $15. Suppose the government levies a tax of $1 on each bottle of wine, and the equilibrium price of a bottle of wine increases to $16. Because total consumer surplus has a. fallen by more than the tax revenue, the tax has a deadweight loss.b. fallen by less than the tax revenue, the tax has no deadweight loss.c. fallen by exactly the amount of the tax revenue, the tax has no deadweight loss.d. increased by less than the tax revenue, the tax has a deadweight loss.



35. Part of the deadweight loss from taxing labor earnings is that peoplea. will work more.b. will be reluctant to hire accountants to file their tax returns.c. with low tax liabilities will universally be worse off than under some other tax policy.d. will work less.

ANS: D DIF: 3 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Deadweight lossesMSC: Interpretive

Table 12-3Ski Weekend Trip

Value to Allyn $85Value to Pam $75Value to Greg $65Value to Dana $40

36. Refer to Table 12-3. Assume that the price of a weekend ski pass is $38 and that the price reflects the actual unit cost of providing a weekend of skiing. What is the value of the surplus that accrues to all four skiers from their weekend trip?a. $105b. $113c. $140d. $265


37. Refer to Table 12-3. Assume that the price of a weekend ski pass is $38 and that the price reflects the actual unit cost of providing a weekend of skiing. How much consumer surplus accrues to Allyn and Greg individually?a. $37 and $17 respectivelyb. $47 and $27 respectivelyc. $49 and $35 respectivelyd. $85 and $65 respectively


38. Refer to Table 12-3. Assume that the price of a weekend ski pass is $38 and that the price reflects the actual unit cost of providing a weekend of skiing. Suppose the government imposes a tax of $15 on skiing, which raises the price of a weekend ski pass to $53. The deadweight loss associated with the tax isa. $2.b. $37.c. $52.d. $97.



Table 12-4Hot Fudge Brownie Delight

Value to Brad $8.00Value to Jennifer $6.00

39. Refer to Table 12-4. Suppose that the government imposes a $2 tax on delights, causing the price to increase from $5.00 to $7.00. Total consumer surplusa. falls by less than the tax revenue generated.b. falls by more than the tax revenue generated.c. falls by the same amount as the tax revenue generated.d. will not fall since Jennifer will no longer be in the market.


40. Refer to Table 12-4. Suppose that the government imposes a $2 tax on delights, causing the price to increase from $5.00 to $7.00. Deadweight loss arises becausea. Jennifer will pay more tax as a percentage of her value of delights than Brad.b. Brad must pay the $2.00 tax from his consumer surplus.c. Brad will have to pay a higher price for delights.d. Jennifer will leave the market.


41. Refer to Table 12-4. Suppose that the government imposes a $2 tax on delights, causing the price to increase from $5.00 to $7.00. Total consumer surplus will fall froma. $4 to $1.b. $7 to $4.c. $3 to $1.d. $7 to $3.


42. The deadweight loss associated with a tax on a commodity is generated bya. the consumers who still choose to consume the commodity but pay a higher price that reflects the

tax.b. the consumers who choose to not consume the commodity that is taxed.c. all citizens who are able to use services provided by government.d. the consumers who are unable to avoid paying the tax.


Scenario 12-1Suppose Jim and Joan receive great satisfaction from their consumption of cheesecake. Joan would be willing to purchase only one slice and would pay up to $6 for it. Jim would be willing to pay $9 for his first slice, $7 for his second slice, and $3 for his third slice. The current market price is $3 per slice.

43. Refer to Scenario 12-1. How much consumer surplus does Joan receive from consuming her slice of cheesecake?a. $3b. $6c. $9d. $12



44. Refer to Scenario 12-1. How much total consumer surplus do Joan and Jim collectively receive from consuming cheesecake?a. $3b. $6c. $9d. $13


45. Refer to Scenario 12-1. Assume that the government places a $4 tax on each slice of cheesecake and that the new equilibrium price is $7. What is Joan's consumer surplus from cheesecake?a. zerob. $2c. $3d. $6


46. Refer to Scenario 12-1. Assume that the government places a $4 tax on each slice of cheesecake and that the new equilibrium price is $7. What is the deadweight loss of the tax?a. $3b. $6c. $8d. $9


47. Refer to Scenario 12-1. Assume that the government places a $4 tax on each slice of cheesecake and that the new equilibrium price is $7. How much tax revenue will be generated from sales to Jim and Joan?a. zerob. $4c. $8d. $12


48. Refer to Scenario 12-1. Assume that the government places a $2 tax on each slice of cheesecake and that the new equilibrium price is $5. What is the deadweight loss of the tax?a. zerob. $3c. $6d. $8



49. Refer to Scenario 12-1. Assume that the government places a $4 tax on each slice of cheesecake and that the new equilibrium price is $7. Which of the following statements is correct?a. Jim will bear the full burden of the deadweight loss.b. Joan will bear the full burden of the deadweight loss.c. Both Joan and Jim will share the burden of the deadweight loss.d. There will be no deadweight loss.


Scenario 12-2

Suppose that Bob places a value of $10 on a movie ticket and that Lisa places a value of $7 on a movie ticket. In addition, suppose the price of a movie ticket is $5.

50. Refer to Scenario 12-2. What is total consumer surplus for Bob and Lisa?a. $0b. $2c. $5d. $7

ANS: D DIF: 2 REF: 12-2NAT: Analytic LOC: Understanding and applying economic modelsTOP: Consumer surplus MSC: Applicative

51. Refer to Scenario 12-2. Suppose the government levies a tax of $1 on each movie ticket and that, as a result, the price of a movie ticket increases to $6.00. If Bob and Lisa both purchase a movie ticket, what is total consumer surplus for Bob and Lisa?a. $0.00b. $0.50c. $5.00d. $6.00

ANS: C DIF: 2 REF: 12-2NAT: Analytic LOC: Understanding and applying economic modelsTOP: Consumer surplus MSC: Applicative

52. Refer to Scenario 12-2. Suppose the government levies a tax of $1 on a movie ticket and that, as a result, the price of a movie ticket increases to $6. If Bob and Lisa both purchase a movie ticket, what is the deadweight loss from the tax?a. $0b. $1c. $2d. $3

ANS: A DIF: 2 REF: 12-2NAT: Analytic LOC: Understanding and applying economic modelsTOP: Deadweight losses MSC: Applicative

53. Refer to Scenario 12-2. Suppose the government levies a tax of $3 on a movie ticket and that, as a result, the price of a movie ticket increases to $8. What is total consumer surplus after the tax is imposed?a. $0b. $1c. $2d. $3

ANS: C DIF: 3 REF: 12-2NAT: Analytic LOC: Understanding and applying economic modelsTOP: Consumer surplus MSC: Applicative


54. Refer to Scenario 12-2. Suppose the government levies a tax of $3 on a movie ticket and that, as a result, the price of a movie ticket increases to $8. What is the deadweight loss from the tax?a. $0b. $1c. $2d. $3

ANS: C DIF: 3 REF: 12-2NAT: Analytic LOC: Understanding and applying economic modelsTOP: Deadweight losses MSC: Applicative

Scenario 12-3. A taxpayer faces the following tax rates on her income:

20 percent of the first $40,000 of her income;30 percent of all her income above $40,000.

55. Refer to Scenario 12-3. The taxpayer faces a. a marginal tax rate of 20 percent when her income rises from $40,000 to $40,001.b. a marginal tax rate of 20 percent when her income rises from $30,000 to $30,001.c. a marginal tax rate of 0 percent when her income rises from $30,000 to $30,001.d. a marginal tax rate of 10 percent when her income rises from $40,000 to $40,001.

ANS: B DIF: 2 REF: 12-2NAT: Analytic LOC: The role of governmentTOP: Average tax rates | Marginal tax rates MSC: Applicative

56. Refer to Scenario 12-3. The taxpayer faces a. an average tax rate of 22.5 percent when her income is $30,000.b. an average tax rate of 22.0 percent when her income is $50,000.c. a marginal tax rate of 10 percent when her income rises from $40,000 to $40,001.d. a marginal tax rate of 50 percent when her income rises from $60,000 to $60,001.

ANS: B DIF: 2 REF: 12-2NAT: Analytic LOC: The role of governmentTOP: Average tax rates | Marginal tax rates MSC: Applicative

57. Refer to Scenario 12-3. At what level of income would the taxpayer’s marginal tax rate be 30 percent and her average tax rate be 25 percent?a. $42,000b. $57,000c. $60,000d. $80,000

ANS: D DIF: 3 REF: 12-2NAT: Analytic LOC: The role of governmentTOP: Average tax rates | Marginal tax rates MSC: Applicative

58. The deadweight loss of an income tax is determined by thea. amount of total tax revenue to the government.b. marginal tax rate.c. average tax rate.d. ability-to-pay principle.

ANS: B DIF: 2 REF: 12-2NAT: Analytic LOC: Efficiency and equityTOP: Deadweight losses | Marginal tax rates MSC: Interpretive


59. A person's marginal tax rate equalsa. her tax obligation divided by her average tax rate.b. the increase in taxes she would pay as a percentage of the rise in her income.c. her tax obligation divided by her income.d. the increase in taxes if her average tax rate were to rise by 1%.

ANS: B DIF: 1 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Marginal tax ratesMSC: Definitional

60. In the United States, the marginal tax rate on individual federal income taxa. decreases as income increases.b. increases as income increases.c. is constant at all income levels.d. applies only to payroll taxes.

ANS: B DIF: 2 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Marginal tax ratesMSC: Applicative

61. Because the marginal tax rate rises as income rises,a. higher income families, in general, pay a larger percentage of their income in taxes.b. lower income families, in general, pay a larger percentage of their income in taxes.c. a disproportionately large share of the tax burden falls upon the poor.d. higher income families pay the same percentage of their income in taxes as lower-income families.

ANS: A DIF: 2 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Marginal tax ratesMSC: Analytical

62. If your income is $40,000 and your income tax liability is $5,000, your marginal tax rate is a. 8 percent.b. 12.5 percent.c. 20 percent.d. unknown. We do not have enough information to answer this question.

ANS: D DIF: 2 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Marginal tax ratesMSC: Analytical

63. Nancy paid a tax of $0.50 on the last dollar she earned in 1999. Nancy's marginal tax rate in 1999 wasa. more than 50 percent.b. exactly 50 percent.c. higher than her average tax rate.d. lower than her average tax rate.

ANS: B DIF: 2 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Marginal tax ratesMSC: Definitional

64. If we want to gauge how much the income tax system distorts incentives, we should use the a. average tax rate.b. ability-to-pay principle.c. total tax revenue collected.d. marginal tax rate.

ANS: D DIF: 2 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Marginal tax ratesMSC: Interpretive


65. Suppose the government imposes a tax of 10 percent on the first $40,000 of income and 20 percent on all income above $40,000. What are the tax liability and the marginal tax rate for a person whose income is $50,000?a. 12 percent and 20 percent, respectivelyb. 12 percent and $50,000, respectivelyc. $6,000 and 12 percent, respectivelyd. $6,000 and 20 percent, respectively


66. Suppose the government imposes a tax of 10 percent on the first $40,000 of income and 20 percent on all income above $40,000. What are the tax liability and the marginal tax rate for a person whose income is $30,000?a. both are 10 percentb. 10 percent and $2,000, respectivelyc. $3,000 and 10 percent, respectivelyd. $3,000 and 20 percent, respectively

ANS: C DIF: 3 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Marginal tax ratesMSC: Analytical

67. Tim earns income of $60,000 per year and pays $21,000 per year in taxes. Tim paid 20 percent in taxes on the first $30,000 he earned. What was the marginal tax rate on the second $30,000 he earned?a. 20 percentb. 30 percentc. 50 percentd. 70 percent


68. Sue earns income of $80,000 per year. Her average tax rate is 30 percent. Sue paid 20 percent in taxes on the first $30,000 she earned. What was the marginal tax rate on the rest of her income?a. 20 percentb. 24 percentc. 30 percentd. 36 percent


69. Sue earns income of $80,000 per year. Her average tax rate is 40 percent. Sue paid $4,500 in taxes on the first $30,000 she earned. What was the marginal tax rate on the rest of her income?a. 15 percentb. 32 percentc. 40 percentd. 55 percent



70. Sue earns income of $80,000 per year. Her average tax rate is 50 percent. Sue paid $5,000 in taxes on the first $30,000 she earned. What was the marginal tax rate on the first $30,000 she earned, and what was the marginal tax rate on the remaining $50,000?a. 6.25 percent and 50.00 percent, respectivelyb. 10.00 percent and 70.00 percent, respectivelyc. 16.67 percent and 60.00 percent, respectivelyd. 16.67 percent and 70.00 percent, respectively


71. A person's tax obligation divided by her income is called hera. marginal social tax rate.b. marginal private tax rate.c. marginal tax rate.d. average tax rate.

ANS: D DIF: 1 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Average tax ratesMSC: Definitional

72. A person's average tax rate equals hera. tax obligation divided by her marginal tax rate.b. increase in taxes if her income were to rise by $1.c. tax obligation divided by her income.d. increase in taxes if her marginal tax rate were to rise 1%.

ANS: C DIF: 1 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Average tax ratesMSC: Definitional

73. Total taxes paid divided by total income is called thea. lump-sum tax liability.b. marginal tax rate.c. average tax rate.d. average consumption tax liability.

ANS: C DIF: 1 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Average tax ratesMSC: Definitional

74. If your income is $40,000 and your income tax liability is $5,000, youra. marginal tax rate is 8 percent.b. average tax rate is 8 percent.c. marginal tax rate is 12.5 percent.d. average tax rate is 12.5 percent.

ANS: D DIF: 2 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Average tax ratesMSC: Analytical

75. If your income is $50,000, your income tax liability is $10,000, and you paid $0.25 in taxes on the last dollar you earned, youra. marginal tax rate is 20 percent.b. average tax rate is 5 percent.c. marginal tax rate is 25 percent.d. average tax rate is 25 percent.



76. If we want to gauge the sacrifice made by a taxpayer, we should use the a. average tax rate.b. marginal tax rate.c. lump-sum tax rate.d. sales tax rate.

ANS: A DIF: 2 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Average tax ratesMSC: Interpretive

77. The average tax rate measures thea. fraction of spending paid in taxes.b. fraction of income paid in taxes.c. incremental rate of tax on income.d. average deadweight loss from all taxes.

ANS: B DIF: 2 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Average tax ratesMSC: Definitional

78. Suppose the government imposes a tax of 10 percent on the first $40,000 of income and 20 percent on all income above $40,000. What is the average tax rate when income is $50,000?a. 20 percentb. 15 percentc. 12 percentd. 10 percent

ANS: C DIF: 3 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Average tax ratesMSC: Analytical

79. Suppose the government imposes a tax of 20 percent on the first $50,000 of income and 30 percent on all income above $50,000. What is the average tax rate when income is $60,000?a. 21.7 percentb. 25.0 percentc. 46.7 percentd. 50.0 percent

ANS: A DIF: 3 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Average tax ratesMSC: Analytical

80. Suppose the government imposes a tax of 20 percent on the first $50,000 of income and 30 percent on all income above $50,000. What is the marginal tax rate when income is $60,000?a. 10 percentb. 20 percentc. 30 percentd. 50 percent



81. Larry faces a progressive tax structure that has the following marginal tax rates: 0 percent on the first $10,000, 10 percent on the next $10,000, 15 percent on the next $10,000, 25 percent on the next $10,000, and 50 percent on all additional income. If Larry earns $75,000, what is his average tax rate?a. 20 percentb. 25 percentc. 30 percentd. 36.67 percent

ANS: C DIF: 3 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Average tax ratesMSC: Analytical

82. Marcus faces a progressive federal income tax structure that has the following marginal tax rates: 0 percent on the first $10,000, 10 percent on the next $10,000, 15 percent on the next $10,000, 25 percent on the next $10,000, and 50 percent on all additional income. In addition, he must pay 5 percent of his income in state income tax and 15.3 percent of his labor income in federal payroll taxes. Marcus earns $60,000 per year in salary and another $10,000 per year in non-labor income. What is his average tax rate?a. 17.19 percentb. 46.69 percentc. 48.87 percentd. 56.01 percent

ANS: B DIF: 3 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Average tax ratesMSC: Analytical

83. Which of the following statements is correct?a. The average tax rate gauges the sacrifice made by a taxpayer, whereas the marginal tax rate gauges

the distortion of taxes on consumer decisions.b. The marginal tax rate gauges the sacrifice made by a taxpayer, whereas the average tax rate gauges

the distortion of taxes on consumer decisions.c. The average tax rate measures how much the tax system discourages people from working.d. The marginal tax rate measures total taxes paid divided by total income.

ANS: A DIF: 2 REF: 12-2NAT: Analytic LOC: Efficiency and equityTOP: Marginal tax rates | Average tax rates MSC: Analytical

84. Suppose that the government taxes income in the following fashion: 30 percent of the first $20,000, 50 percent of the next $30,000, and 60 percent of all income over $50,000. George earns $40,000, and Elaine earns $60,000. Which of the following statements is correct?a. George's marginal tax rate is 60 percent, and his average tax rate is 50 percent.b. George's marginal tax rate is 50 percent, and his average tax rate is 40 percent.c. Elaine's marginal tax rate is 50 percent, and her average tax rate is 45 percent.d. Elaine's marginal tax rate is 60 percent, and her average tax rate is 40 percent.

ANS: B DIF: 3 REF: 12-2NAT: Analytic LOC: Efficiency and equityTOP: Marginal tax rates | Average tax rates MSC: Analytical


85. Suppose that the government taxes income in the following fashion: 20 percent of the first $50,000, 40 percent of the next $50,000, and 60 percent of all income over $100,000. John earns $200,000, and Theresa earns $600,000. Which of the following statements is correct?a. John's marginal tax rate is higher than Theresa's marginal tax rate.b. John's average tax rate is higher than his marginal tax rate.c. Theresa's average tax rate is higher than her marginal tax rate.d. Theresa's average tax rate is higher than John's average tax rate.

ANS: D DIF: 3 REF: 12-2NAT: Analytic LOC: Efficiency and equityTOP: Marginal tax rates | Average tax rates MSC: Analytical

86. Pat calculates that for every extra dollar she earns, she owes the government 33 cents. Her total income now is $35,000, on which she pays taxes of $7,000. Determine her average tax rate and her marginal tax rate.a. Her average tax rate is 33% and her marginal tax rate is 20%.b. Her average tax rate is 20% and her marginal tax rate is 33%.c. Her average tax rate is 20% and her marginal tax rate is 20%.d. Her average tax rate is 33% and her marginal tax rate is 33%.

ANS: B DIF: 3 REF: 12-2NAT: Analytic LOC: Efficiency and equityTOP: Average tax rates | Marginal tax rates MSC: Analytical

87. Under a progressive tax system, the marginal tax rate could be equal to the average tax rate only when a taxpayer a. has a very high income.b. has a very low income.c. is self-employed.d. invests in a retirement plan.

ANS: B DIF: 3 REF: 12-2NAT: Analytic LOC: Efficiency and equityTOP: Marginal tax rates | Average tax rates MSC: Analytical

88. Under a regressive tax system,a. the marginal tax rate for high income taxpayers is higher than the marginal tax rate for low income

taxpayers.b. the marginal tax rate for high income taxpayers is the same as the marginal tax rate for low income

taxpayers.c. the marginal tax rate for high income taxpayers is lower than the marginal tax rate for low income

taxpayers.d. Any of the above could be true under a regressive tax system.


89. With a lump-sum tax,a. the average tax rate for high income taxpayers will be the same as the average tax rate for low

income taxpayers.b. the average tax rate for high income taxpayers will be lower than the average tax rate for low

income taxpayers.c. the average tax rate for high income taxpayers will be higher than the average tax rate for high

income taxpayers.d. Any of the above could be true under a regressive tax system.



90. Martavius faces a progressive federal income tax structure that has the following marginal tax rates: 0 percent on the first $10,000, 10 percent on the next $10,000, 15 percent on the next $10,000, 25 percent on the next $10,000, and 50 percent on all additional income. In addition, he must pay 5 percent of his income in state income tax and 15.3 percent of his labor income in federal payroll taxes. Marcus earns $70,000 per year in salary and another $20,000 per year in non-labor income. What is his average tax rate, and what is his marginal tax rate on his salary?a. His average tax rate is 17.19 percent, and the marginal tax rate on his salary is 55 percent.b. His average tax rate is 50.23 percent, and the marginal tax rate on his salary is 70.3 percent.c. His average tax rate is 53.63 percent, and the marginal tax rate on his salary is 70.3 percent.d. His average tax rate is 55.79 percent, and the marginal tax rate on his salary is 70.3 percent.

ANS: B DIF: 3 REF: 12-2NAT: Analytic LOC: Efficiency and equityTOP: Average tax rates | Marginal tax rates MSC: Analytical

Table 12-5Income Tax rate$0 to $40,000 20%Over $40,000 50%

91. Refer to Table 12-5. What is the marginal tax rate for a person who makes $35,000?a. 20%b. 30%c. 40%d. 50%




93. Refer to Table 12-5. What is the average tax rate for a person who makes $60,000?a. 20%b. 30%c. 40%d. 50%



Table 12-6Income Tax rate$0 to $40,000 25%$40,000 to $100,000 40%Over $100,000 60%









Table 12-7Income Tax rate$0 to $50,000 20%$50,001 to $100,000 40%Over $100,000 60%

98. Refer to Table 12-7. What is the marginal tax rate for a person who makes $37,000?a. 9.25%b. 20%c. 25%d. 40%

ANS: B DIF: 2 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Marginal tax ratesMSC: Analytical








102. Why do some policymakers support a consumption tax rather than an earnings tax?a. Because the average tax rate would be lower under a consumption tax.b. Because a consumption tax would encourage people to save earned income.c. Because a consumption tax would raise more revenues than an income tax.d. Because the marginal tax rate would be higher under an earnings tax.

ANS: B DIF: 2 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Consumption taxMSC: Interpretive

103. European countries tend to rely on which type of tax more so than the United States does?a. An income taxb. A lump-sum taxc. A value-added taxd. A corrective tax

ANS: C DIF: 2 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Consumption taxMSC: Applicative

104. A value-added tax or VAT is a tax on a. retail purchases only.b. wholesale purchases only.c. pollution.d. all stages of production of a good.

ANS: D DIF: 2 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Consumption taxMSC: Definitional


105. Economist Alan Greenspan discussed the advantages of which kind of tax system, “particularly if one were designing a tax system from scratch”?a. A progressive tax systemb. A regressive tax systemc. A consumption taxd. A lump-sum tax

ANS: C DIF: 2 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Consumption taxMSC: Applicative

106. When the government taxes labor earnings we can expect people toa. work more so they can keep the same standard of living.b. work less and enjoy more leisure.c. quit their present job and find one that pays better.d. stop working altogether and go on welfare.

ANS: B DIF: 2 REF: 12-1 | 12-2NAT: Analytic LOC: Efficiency and equityTOP: Income taxes | Deadweight losses MSC: Interpretive

107. The U.S. income taxa. discourages saving.b. encourages saving.c. has no effect on saving.d. will reduce the administrative burden of taxation.

ANS: A DIF: 1 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Income taxesMSC: Applicative

108. When interest income from savings is taxed,a. people will save more to make up for what is lost in taxes.b. people will save the same amount as they would have without the tax.c. people will save less than they would without the tax.d. None of the above is correct since the government would not tax interest on savings.

ANS: C DIF: 1 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Income taxesMSC: Applicative

109. A consumption tax is a tax ona. goods but not on services.b. the amount of income that people spend.c. the amount of income that people earn.d. the amount of income that people save.

ANS: B DIF: 1 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Income taxesMSC: Applicative

110. Tax evasion isa. facilitated by legal deductions to taxable income.b. the same as tax avoidance.c. recommended by the American Accounting Association.d. illegal.

ANS: D DIF: 1 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Income taxesMSC: Applicative


111. Which of the following describes a situation where tax laws give preferential treatment to specific types of behavior?a. Tax evasionb. A political payoffc. A tax loopholed. Compensation for the benefit of society


112. The U.S. tax code gives preferential treatment to investors in municipal bonds. This is an example of a. a tax loophole.b. tax evasion.c. an administrative burden.d. tax enforcement.


113. High marginal income tax ratesa. distort incentives to work.b. are used to encourage saving behavior.c. will invariably lead to lower average tax rates.d. are not associated with deadweight losses.


114. Tax systems that impose record keeping requirements on taxpayers are said to havea. an auditing burden.b. a lower incidence of compliance.c. an administrative burden.d. a certification requirement.

ANS: C DIF: 1 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Income taxesMSC: Definitional

115. Incentives to work and save are reduced whena. income taxes are higher.b. consumption taxes replace income taxes.c. corrective taxes are implemented.d. All of the above are correct.


116. An advantage of a consumption tax over the present tax system is that a consumption taxa. raises more revenues.b. would save the government millions in administrative costs.c. places more of the tax burden on the wealthy.d. does not discourage saving.

ANS: D DIF: 2 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Income taxesMSC: Interpretive


117. Which of the following statements is correct?a. Both tax avoidance and tax evasion are legal.b. Both tax avoidance and tax evasion are illegal.c. Tax avoidance is legal, whereas tax evasion is illegal.d. Tax avoidance is illegal, whereas tax evasion is legal.


118. In many cases, tax loopholes are designed by Congress toa. give special treatment to specific types of behavior.b. reduce the overall administrative burden of the tax system.c. raise revenues for special projects.d. All of the above are correct.

ANS: A DIF: 2 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Income taxesMSC: Interpretive

119. A mortgage interest deduction would be considereda. tax evasion.b. a subsidy to the poor.c. a deduction that benefits all members of society equally.d. a tax loophole.

ANS: D DIF: 2 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Income taxesMSC: Applicative

120. As tax laws become more complex,a. the administrative burden of taxes will increase.b. compliance costs are likely to decrease.c. the government will collect more in tax revenue.d. the amount of tax revenue lost to tax evasion will decrease.


121. Which of the following is not an administrative burden of our tax system?a. Government resources used to enforce tax lawsb. Keeping tax records throughout the yearc. Paying the taxes owedd. Time spent in April filling out forms


122. A tax on all forms of income willa. lower the effective rate of interest on savings.b. have no effect on savings.c. enhance social welfare because the benefits will outweigh the costs.d. enhance the incentives to save.

ANS: A DIF: 2 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Income taxesMSC: Interpretive


123. Changing the basis of taxation from income earned to amount spent willa. necessarily reduce tax revenues.b. lower effective interest rates on savings.c. distort incentives to earn income.d. eliminate disincentives to save.

ANS: D DIF: 2 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Income taxesMSC: Interpretive

124. If the government imposes a tax of $3,000 on everyone, the tax would be a. an income tax.b. a consumption tax.c. a lump-sum tax.d. a marginal tax.

ANS: C DIF: 1 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Lump-sum taxesMSC: Definitional

125. The most efficient tax possible is aa. marginal income tax.b. lump-sum tax.c. consumption tax.d. corporate profit tax.

ANS: B DIF: 2 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Lump-sum taxesMSC: Applicative

126. A lump-sum taxa. is most frequently used to tax real property.b. does not distort incentives.c. distorts incentives more than any other type of tax.d. is the most fair tax.

ANS: B DIF: 2 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Lump-sum taxesMSC: Applicative

127. The marginal tax rate for a lump-sum taxa. is always positive.b. is always negative.c. is zero.d. can take on any value but must be greater than the average tax rate.

ANS: C DIF: 2 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Lump-sum taxesMSC: Interpretive

128. Which of the following in not a reason that a lump-sum tax imposes a minimal administrative burden on taxpayers?a. Everyone can easily compute the amount of tax owed.b. There is no benefit to hiring an accountant to do your taxes.c. Everyone owes the same amount of tax, regardless of earnings.d. The government can easily forecast tax revenues.

ANS: D DIF: 2 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Lump-sum taxesMSC: Interpretive


129. If the government were to impose a tax that assigned everyone the same tax liability, it would bea. a lump-sum tax.b. an equitable tax.c. supported by the poor.d. a progressive tax.

ANS: A DIF: 2 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Lump-sum taxesMSC: Definitional

130. One advantage of a lump-sum tax over other taxes is that ita. is both equitable and efficient.b. doesn't cause deadweight loss.c. would place a larger tax burden on the rich.d. would raise more revenues.

ANS: B DIF: 2 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Lump-sum taxesMSC: Interpretive

131. Which of the following is not an advantage of a lump-sum tax in comparison to other types of taxes?a. It would not cause deadweight loss.b. It imposes a minimal administrative burden on taxpayers.c. It is more equitable.d. It is more efficient.


132. Lump-sum taxes are rarely used in the real world becausea. while lump-sum taxes have low administrative burdens, they have high deadweight losses.b. while lump-sum taxes have low deadweight losses, they have high administrative burdens.c. lump-sum taxes are often viewed as unfair because they take the same amount of money from both

poor and rich.d. lump-sum taxes are very inefficient.


133. With a lump-sum tax, thea. marginal tax rate is always less than the average tax rate.b. average tax rate is always less than the marginal tax rate.c. marginal tax rate falls as income rises.d. marginal tax rate rises as income rises.

ANS: A DIF: 3 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Lump-sum taxesMSC: Analytical


Table 12-8Taxpayer IncomeMarcia $40,000Charles $30,000

134. Refer to Table 12-8. If the government imposes a $2,000 lump-sum tax, the average tax rate for Marcia and Charles would bea. 5 percent and 6.7 percent, respectively.b. 8 percent and 6 percent, respectively.c. 12 percent and 9 percent, respectively.d. 13 percent and 10 percent, respectively.

ANS: A DIF: 3 REF: 12-2NAT: Analytic LOC: Efficiency and equityTOP: Average tax rates | Lump-sum taxes MSC: Analytical

135. Refer to Table 12-8. If the government imposes a $3,000 lump-sum tax, the marginal tax rate for Charles would bea. 0 percent.b. 5 percent.c. 6.7 percent.d. 10 percent.

ANS: A DIF: 2 REF: 12-2NAT: Analytic LOC: Efficiency and equityTOP: Marginal tax rates | Lump-sum taxes MSC: Analytical

Table 12-9

The table below shows the marginal tax rates for an unmarried taxpayer for various levels of taxable income.

On Taxable Income... The Tax Rate is...$0 to $10,000 10%$10,000 to $30,000 25%$30,000 to $60,000 35%$60,000 to $110,000 40%$110,000 to $180,000 43%Over $180,000 45%

136. Refer to Table 12-9. For this tax schedule, what is the marginal tax rate for an individual with taxable income of $49,000?a. 0%b. 10%c. 25%d. 35%

ANS: D DIF: 2 REF: 12-2NAT: Analytic LOC: The role of government TOP: Marginal tax ratesMSC: Analytical

137. Refer to Table 12-9. For this tax schedule, what is the marginal tax rate for an invidvidual with $212,000 in taxable income?a. 0%b. 1%c. 2%d. 45%

ANS: D DIF: 2 REF: 12-2NAT: Analytic LOC: The role of government TOP: Marginal tax ratesMSC: Analytical


138. Refer to Table 12-9. For this tax schedule, what is the average tax rate for an individual with $49,000 in taxable income?a. 25.8%b. 27.5%.c. 40.0%d. 43.7%

ANS: A DIF: 2 REF: 12-2NAT: Analytic LOC: The role of government TOP: Average tax ratesMSC: Applicative

139. Refer to Table 12-9. For this tax schedule, what is the average tax rate for an individual with $280,000 in taxable income?a. 39.9%b. 40.2%c. 42.7%d. 44.8%

ANS: A DIF: 2 REF: 12-2NAT: Analytic LOC: The role of government TOP: Average tax ratesMSC: Applicative

140. Refer to Table 12-9. For this tax schedule, what is the total income tax due for an individual with $49,000 in taxable income?a. $12,650b. $14,370c. $15,960d. $16,220

ANS: A DIF: 2 REF: 12-2NAT: Analytic LOC: The role of government TOP: Tax liabilityMSC: Applicative

141. Refer to Table 12-9. For this tax schedule, what is the total tax liability for an individual with $280,000 in taxable income?a. $105,700b. $108,900c. $111,600d. $117,300

ANS: C DIF: 2 REF: 12-2NAT: Analytic LOC: The role of government TOP: Tax liabilityMSC: Applicative


Table 12-10

The following table shows the marginal tax rates for unmarried individuals for two years.

2005 2006On Taxable Income... The Tax Rate is... On Taxable Income... The Tax Rate is...

$0 to $15,000 10% Over $0 20%$15,000 to $40,000 15%$40,000 to $75,000 20%$75,000 to $120,000 25%Over $120,000 30%

142. Refer to Table 12-10. For an individual who earned $80,000 in both years, which of the following statements is true regarding the individual’s marginal tax rate?a. The marginal tax rate is higher in 2006 than in 2005.b. The marginal tax rate is the same in 2006 as it was in 2005.c. The marginal tax rate is lower in 2006 than in 2005.d. With a proportional tax, as in 2006, it is not possible to determine the individual’s marginal tax rate

so it is not possible to compare the marginal tax rates in the two years.

ANS: C DIF: 2 REF: 12-2NAT: Analytic LOC: The role of government TOP: Marginal tax ratesMSC: Analytical

143. Refer to Table 12-10. For an individual who earned $80,000 of taxable income in 2005, what was the individual’s average tax rate in 2005?a. 12.7%b. 15.0%c. 16.1%d. 16.9%

ANS: D DIF: 2 REF: 12-2NAT: Analytic LOC: The role of government TOP: Average tax ratesMSC: Applicative

144. Refer to Table 12-10. For an individual who earned $35,000 in taxable income in both years, which of the following describes the change in the individual’s marginal tax rate between the two years?a. The marginal tax rate increased from 2005 to 2006.b. The marginal tax rate decreased from 2005 to 2006.c. The marginal tax rate remained constant from 2005 to 2006.d. The change in the marginal tax rate cannot be determined for the two tax schedules shown.

ANS: A DIF: 2 REF: 12-2NAT: Analytic LOC: The role of government TOP: Marginal tax ratesMSC: Analytical

145. Refer to Table 12-10. For an individual who earned $35,000 in taxable income in both years, which of the following describes the change in the individual’s average tax rate between the two years?a. The average tax rate increased from 2005 to 2006.b. The average tax rate decreased from 2005 to 2006.c. The average tax rate remained constant from 2005 to 2006.d. The change in the average tax rate cannot be determined for the two tax schedules shown.

ANS: A DIF: 2 REF: 12-2NAT: Analytic LOC: The role of government TOP: Average tax ratesMSC: Analytical


Table 12-11

The following table presents the total tax liability for an unmarried taxpayer under four different tax schedules for the income levels shown.

Amount of Tax Due

Income Tax Schedule A Tax Schedule B Tax Schedule C Tax Schedule D$50,000 $10,000 $20,000 $17,500 $15,000$100,000 $30,000 $30,000 $25,000 $30,000$200,000 $80,000 $40,000 $30,000 $60,000

146. Refer to Table 12-11. For an individual with $200,000 in taxable income, which tax schedule has the lowest marginal tax rate?a. Tax Schedule Bb. Tax Schedule Cc. Tax Schedule Dd. It is impossible to determine which tax schedule has the lowest marginal tax rate from the given

information.


147. Refer to Table 12-11. For an individual with $200,000 in taxable income, which tax schedule has the highest average tax rate?a. Tax Schedule Ab. Tax Schedule Bc. Tax Schedule Cd. Tax Schedule D

ANS: A DIF: 2 REF: 12-2NAT: Analytic LOC: Efficiency and equity TOP: Average tax ratesMSC: Analytical

Table 12-12United States Income Tax Rates for a Single Individual, 2002 and 2003.

2002 Tax Rates Income Ranges 2003 Tax Rates Income Ranges 15% $0 – $27,050 10% $0 – $6,000 28% $27,051 – $65,550 15% $6,001 – $28,400 31% $65,551 – $136,750 27% $28,401 – $68,800 36% $136,751 – $297,350 30% $68,801 – $143,500 39.6% $297,350 and above 35% $143,501 – $311,950

38.6% $311,951 and above

148. Refer to Table 12-12. Charles is a single person whose taxable income is $35,000 a year. What is his average tax rate in 2002?a. 18%b. 20.5%c. 21%d. 28%



149. Refer to Table 12-12. Charles is a single person whose taxable income is $35,000 a year. What is his average tax rate in 2003?a. 16.4%b. 19.6%c. 21.3%d. 27%


150. Refer to Table 12-12. Charles is a single person whose taxable income is $35,000 a year. What happened to his average tax rate between 2002 and 2003?a. It increased.b. It decreased.c. It did not change.d. We do not have enough information to answer this question.

ANS: B DIF: 3 REF: 12-2NAT: Analytic LOC: The role of government TOP: Average tax ratesMSC: Analytical

151. Refer to Table 12-12. Samantha is a single person whose taxable income is $100,000 a year. What is her average tax rate in 2002?a. 22.3%b. 25.5%c. 27.8%d. 28.4%


152. Refer to Table 12-12. Samantha is a single person whose taxable income is $100,000 a year. What is her average tax rate in 2003?a. 24.2%b. 26.4%c. 27.8%d. 30%


153. Refer to Table 12-12. Samantha is a single person whose taxable income is $100,000 a year. What happened to her average tax rate between 2002 and 2003?a. It increased.b. It decreased.c. It did not change.d. We do not have enough information to answer this question.



154. Refer to Table 12-12. Charles is a single person whose taxable income is $35,000 a year. What is his marginal tax rate in 2002?a. 15%b. 28%c. 31%d. 36%

ANS: B DIF: 2 REF: 12-2NAT: Analytic LOC: The role of government TOP: Marginal tax ratesMSC: Analytical

155. Refer to Table 12-12. Charles is a single person whose taxable income is $35,000 a year. What is his marginal tax rate in 2003?a. 10%b. 15%c. 27%d. 30%


156. Refer to Table 12-12. Charles is a single person whose taxable income is $35,000 a year. What happened to his marginal tax rate between 2002 and 2003?a. It increased.b. It decreased.c. It did not change.d. We do not have enough information to answer this question.


157. Refer to Table 12-12. Samantha is a single person whose taxable income is $100,000 a year. What is her marginal tax rate in 2002?a. 15%b. 28%c. 31%d. 36%


158. Refer to Table 12-12. Samantha is a single person whose taxable income is $100,000 a year. What is her marginal tax rate in 2003?a. 15%b. 27%c. 30%d. 35%



159. Refer to Table 12-12. Samantha is a single person whose taxable income is $100,000 a year. What happened to her marginal tax rate between 2002 and 2003?a. It increased.b. It decreased.c. It did not change.d. We do not have enough information to answer this question.


Sec03 - The Design of the Tax System - Taxes and Equity

MULTIPLE CHOICE

Table 12-13

The following table shows the marginal tax rates for unmarried individuals for two years.

2005 2006On Taxable Income... The Tax Rate is... On Taxable Income... The Tax Rate is...

$0 to $15,000 10% Over $0 20%$15,001 to $40,000 15%$40,001 to $75,000 20%$75,001 to $120,000 25%Over $120,000

1. Refer to Table 12-13. Suppose one goal of the tax system was to achieve vertical equity. While people may disagree about what is “equitable,” based on the marginal tax rates given for the two years, which of the following statements is true?a. Vertical equity is possible in both years.b. Vertical equity is possible in 2005 but not in 2006.c. Vertical equity is not possible in 2005 but is possible in 2006.d. Vertical equity is not possible in either year.

ANS: A DIF: 3 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Vertical equityMSC: Analytical

2. Refer to Table 12-13. Which of the following best describes the tax schedule in 2005?a. Proportional taxb. Progressive taxc. Regressive taxd. Vertical tax

ANS: B DIF: 2 REF: 12-3NAT: Analytic LOC: The study of economics, and definitions of economicsTOP: Progressive taxes MSC: Interpretive


Table 12-14

The following table presents the total tax liability for an unmarried taxpayer under four different tax schedules for the income levels shown.

Amount of Tax Due

Income Tax Schedule A Tax Schedule B Tax Schedule C Tax Schedule D$50,000 $10,000 $20,000 $17,500 $15,000$100,000 $30,000 $30,000 $25,000 $30,000$200,000 $80,000 $40,000 $30,000 $60,000

3. Refer to Table 12-14. Which tax schedules are progressive?a. Tax Schedule A onlyb. Tax Schedule A and Tax Schedule Bc. Tax Schedule A, Tax Schedule B, and Tax Schedule Cd. All four Tax Schedules are progressive.

ANS: A DIF: 2 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Progressive taxesMSC: Analytical

4. Refer to Table 12-14. Which tax schedules are regressive?a. Tax Schedule A and Tax Schedule Bb. Tax Schedule B and Tax Schedule Cc. Tax Schedule C and Tax Schedule Dd. None of the Tax Schedules are regressive.

ANS: B DIF: 2 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Regressive taxesMSC: Analytical

5. Refer to Table 12-14. Which tax schedules are proportional?a. Tax Schedule B onlyb. Tax Schedule B and Tax Schedule Cc. Tax Schedule D onlyd. Tax Schedule A and Tax Schedule B

ANS: C DIF: 2 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Proportional taxesMSC: Analytical

6. Refer to Table 12-14. Which tax schedule could be considered a lump-sum tax?a. Tax Schedule B onlyb. Tax Schedule B and Tax Schedule Cc. Tax Schedule D onlyd. None of the tax schedules could be considered a lump-sum tax.

ANS: D DIF: 2 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Proportional taxesMSC: Analytical

7. The notion that similar taxpayers should pay similar amounts of taxes is known asa. vertical equity.b. the benefits principle.c. horizontal equity.d. taxpayer efficiency.

ANS: C DIF: 1 REF: 12-3NAT: Analytic LOC: The study of economics, and definitions of economicsTOP: Horizontal equity MSC: Definitional


Table 12-15

The dollar amounts in the last three columns are the taxes owed under the three different tax systems.

Income Tax System A Tax System B Tax System C$ 50,000 $10,000 $25,000 $10,000 100,000 25,000 30,000 20,000 200,000 80,000 40,000 40,000

8. Refer to Table 12-15. Which of the three tax systems is proportional?a. Tax System Ab. Tax System Bc. Tax System Cd. None of the systems are proportional.

ANS: C DIF: 2 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Proportional taxesMSC: Applicative

9. Refer to Table 12-15. Which of the three tax systems is regressive?a. Tax System Ab. Tax System Bc. Tax System Cd. None of the systems are regressive.

ANS: B DIF: 2 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Regressive taxesMSC: Applicative

10. Refer to Table 12-15. Which of the three tax systems is progressive?a. Tax System Ab. Tax System Bc. Tax System Cd. All of the tax systems are progressive.

ANS: A DIF: 2 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Progressive taxesMSC: Applicative

11. Suppose an excise tax is imposed on luxury boats and yachts. Economists argue that such a taxa. is sure to be vertically equitable, since buyers of luxury boats and yachts are wealthy.b. entails no deadweight loss as long as buyers of boats and yachts can easily substitute one luxury

good for another.c. violates the benefits principle of taxation.d. may burden workers in the luxury-boat-and-yacht industry more than it burdens the buyers of

luxury boats and yachts.

ANS: D DIF: 2 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Tax equityMSC: Interpretive

12. A lump-sum taxa. is also a proportional tax.b. entails larger deadweight losses than other types of taxes.c. is the most efficient tax possible.d. is the most equitable tax possible.



Table 12-16United States Income Tax Rates for a Single Individual, 2002 and 2003.

2002 Tax Rates Income Ranges 2003 Tax Rates Income Ranges 15% $0 – $27,050 10% $0 – $6,000 28% $27,051 – $65,550 15% $6,001 – $28,400 31% $65,551 – $136,750 27% $28,401 – $68,800 36% $136,751 – $297,350 30% $68,801 – $143,500 39.6% $297,350 and above 35% $143,501 – $311,950

38.6% $311,951 and above

13. Refer to Table 12-16. What type of tax structure did the United States have in 2002 for single individuals?a. A proportional tax structureb. A regressive tax structurec. A progressive tax structured. A lump-sum tax structure

ANS: C DIF: 3 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Progressive taxesMSC: Analytical

14. Refer to Table 12-16. What type of tax structure does the United States have in 2003 for single individuals?a. A proportional tax structureb. A regressive tax structurec. A progressive tax structured. A lump-sum tax structure


15. The concept that people should pay taxes based on the benefits they receive from government services is calleda. the ability-to-pay principle.b. the benefits principle.c. horizontal equity.d. vertical equity.

ANS: B DIF: 1 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Benefits principleMSC: Definitional

16. The principle that people should pay taxes based on the benefits they receive from government services is called thea. pay principle.b. tax-benefit principle.c. government services principle.d. benefits principle.

ANS: D DIF: 1 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Benefits principleMSC: Definitional


17. The benefits principle is used to justifya. property taxes.b. gasoline taxes.c. “sin” taxes on cigarettes and alcoholic beverages.d. personal income taxes.

ANS: B DIF: 1 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Benefits principleMSC: Applicative

18. If revenue from a gasoline tax is used to build and maintain public roads, the gasoline tax may be justified on the basis ofa. the benefits principle.b. the ability-to-pay principle.c. vertical equity.d. horizontal equity.

ANS: A DIF: 1 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Benefits principleMSC: Applicative

19. The theory that the wealthy should contribute more to police protection than the poor because they have more to protect is based ona. the ability-to-pay principle.b. a consumption tax plan.c. the benefits principle.d. property tax assessments.

ANS: C DIF: 1 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Benefits principleMSC: Applicative

20. When a tax is justified on the basis that the taxpayers who pay the tax receive specific government services from payment of the tax, the taxa. is considered horizontally equitable.b. burden is minimized.c. satisfies the benefits principle.d. is considered vertically equitable.

ANS: C DIF: 2 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Benefits principleMSC: Definitional

21. If a poor family has three children in public school and a rich family has two children in private school, the benefits principle would suggest thata. the poor family should pay more in taxes to pay for public education than the rich family.b. the rich family should pay more in taxes to pay for public education than the poor family.c. the benefits of private school exceed those of public school.d. public schools should be financed by property taxes.

ANS: A DIF: 2 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Benefits principleMSC: Interpretive

22. The benefits principle of taxation can be used to argue that wealthy citizens should pay higher taxes than poorer ones on the basis thata. police services are more frequently used in poor neighborhoods.b. the wealthy benefit more from services provided by government than the poor.c. the poor are more active in political processes.d. the poor receive welfare payments.

ANS: B DIF: 2 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Benefits principleMSC: Interpretive


23. Vertical equity states that taxpayers with a greater ability to pay taxes shoulda. contribute a decreasing proportion of each increment in income to taxes.b. contribute a larger amount than those with a lesser ability to pay.c. be less subject to administrative burdens of a tax.d. be less subject to tax distortions that lead to deadweight losses.

ANS: B DIF: 1 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Ability-to-pay principleMSC: Definitional

24. The argument that each person should pay taxes according to how well the individual can shoulder the burden is calleda. the ability-to-pay principle.b. the equity principle.c. the benefits principle.d. regressive.

ANS: A DIF: 1 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Ability-to-pay principleMSC: Definitional

25. "A $1,000 tax paid by a poor person may be a larger sacrifice than a $10,000 tax paid by a wealthy person" is an argument in favor ofa. the horizontal equity principle.b. the benefits principle.c. a regressive tax argument.d. the ability-to-pay principle.

ANS: D DIF: 1 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Ability-to-pay principleMSC: Interpretive

26. Vertical equity and horizontal equity are associated witha. the benefits principle of taxation.b. the ability-to-pay principle of taxation.c. taxes that have no deadweight losses.d. falling marginal tax rates.

ANS: B DIF: 2 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Ability-to-pay principleMSC: Applicative

27. The claim that all citizens should make an "equal sacrifice" to support government programs is usually associated witha. the ability-to-pay principle.b. the benefits principle.c. efficiency arguments.d. regressive tax arguments.

ANS: A DIF: 2 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Ability-to-pay principleMSC: Applicative

28. A tax system based on the ability-to-pay principle claims that all citizens shoulda. pay taxes based on the benefits they receive from government services.b. pay the same amount in taxes.c. pay taxes based on consumption rather than income.d. make an equal sacrifice.

ANS: D DIF: 2 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Ability-to-pay principleMSC: Applicative


29. Vertical equity in taxation refers to the idea that peoplea. in unequal conditions should be treated differently.b. in equal conditions should pay equal taxes.c. should pay taxes based on the benefits they receive from the government.d. should pay a proportional tax rather than a progressive tax.

ANS: A DIF: 1 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Vertical equityMSC: Definitional

30. In the 1980s, President Ronald Reagan argued that high tax rates distorted economic incentives to work and save. In the 1990s, President Bill Clinton argued that the rich were not paying their fair share of taxes. Which of the following statements best summarizes the economic theories behind the differing philosophies?a. President Reagan was concerned about vertical equity, whereas President Clinton was concerned

about horizontal equity.b. President Reagan was concerned about average tax rates, whereas President Clinton was concerned

about horizontal equity.c. President Reagan was concerned about marginal tax rates, whereas President Clinton was

concerned about vertical equity.d. None of the above is correct.

ANS: C DIF: 2 REF: 12-3NAT: Analytic LOC: Efficiency and equityTOP: Marginal tax rates | Vertical equity MSC: Interpretive

31. Which of the following tax systems could not be structured to satisfy conditions of vertical equity?a. A proportional taxb. A regressive taxc. A progressive taxd. A lump-sum tax

ANS: D DIF: 3 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Vertical equityMSC: Interpretive

32. Horizontal equity in taxation refers to the idea that peoplea. in unequal conditions should be treated differently.b. in equal conditions should pay equal taxes.c. should be taxed according to their ability to pay.d. should receive government benefits according to how much they have been taxed.

ANS: B DIF: 1 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Horizontal equityMSC: Definitional

33. The idea that people in equal conditions should pay equal taxes is referred to asa. horizontal equity.b. vertical equity.c. the ability-to-pay principle.d. the marriage tax.

ANS: A DIF: 1 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Horizontal equityMSC: Definitional


34. Two families who live in Plains, GA have identical incomes. The Smiths deduct $5,000 from their taxable income for mortgage interest paid during the year. The Jones family lives in an apartment and is not eligible for a mortgage-interest deduction. This situation exemplifiesa. an application of the benefits principle of taxation.b. a violation of horizontal equity.c. a violation of vertical equity.d. an application of egalitarian tax rules.

ANS: B DIF: 2 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Horizontal equityMSC: Applicative

35. A tax that is higher for men than for women violates the criterion ofa. horizontal equity.b. vertical equity.c. the ability-to-pay principle.d. the marriage tax.

ANS: A DIF: 2 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Horizontal equityMSC: Analytical

36. One of the most difficult issues associated with trying to structure a tax policy to satisfy horizontal equity is determininga. whether or not a taxpayer falls within the highest income quintile.b. the level of transfer payments made to low-income groups.c. the source of income for taxpayers.d. what differences are relevant to a family's ability to pay.

ANS: D DIF: 2 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Horizontal equityMSC: Interpretive

37. Which of the following statements is not correct?a. A gasoline tax can be an example of a benefits tax.b. A progressive tax attempts to achieve vertical equity.c. A progressive tax can be an example of the ability-to-pay principle.d. A regressive tax attempts to achieve horizontal equity.

ANS: D DIF: 3 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Horizontal equityMSC: Interpretive

38. Tax incidence refers toa. what product or service the tax is levied on.b. who bears the tax burden.c. what sector of the economy is most affected by the tax.d. the dollar value of the tax revenues.

ANS: B DIF: 1 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Tax burdenMSC: Definitional

39. In order to determine tax incidence, one must a. consider issues of equity.b. also determine the legal liability of the tax.c. evaluate where the tax burden eventually falls.d. use the "flypaper theory" of taxation.

ANS: C DIF: 2 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Tax burdenMSC: Applicative


40. In order to construct a more complete picture of the economic burden of government across income classes, economists usuallya. include tax payments as well as transfer payments received.b. focus only on the tax payments of wealthy tax payers.c. limit their analysis to taxes based on the ability-to-pay principle.d. focus their analysis on issues of tax efficiency.

ANS: A DIF: 2 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Tax burdenMSC: Interpretive

41. If transfer payments are included when evaluating tax burdens, then the average tax rate of the poorest quintile of taxpayers would be approximatelya. negative 30 percent.b. negative 10 percent.c. positive 1 percent.d. positive 8 percent.

ANS: A DIF: 2 REF: 12-3NAT: Analytic LOC: Efficiency and equityTOP: Tax burden | Transfer payments MSC: Applicative

42. Which tax system requires all taxpayers to pay the same percentage of their income in taxes?a. A regressive taxb. A proportional taxc. A progressive taxd. A horizontal equity tax

ANS: B DIF: 1 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Proportional taxesMSC: Definitional

43. If a tax takes a constant fraction of income as income rises, it isa. regressive.b. proportional.c. progressive.d. based on the ability-to-pay principle.

ANS: B DIF: 2 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Proportional taxesMSC: Analytical

44. An income tax in which the average tax rate is the same for all taxpayers would be considered aa. progressive tax.b. regressive tax.c. distortion-free tax.d. proportional tax.

ANS: D DIF: 2 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Proportional taxesMSC: Interpretive


45. Which of the following statements is correct?a. Vertical equity is the idea that taxpayers with similar abilities to pay taxes should pay the same

amount.b. Horizontal equity is the idea that taxes should be levied on a person according to how well that

person can shoulder the burden.c. A regressive tax would mean that high-income tax payers pay a larger fraction of their income in

taxes than would low-income taxpayers.d. A proportional tax would mean that high-income and low-income taxpayers pay the same fraction

of income in taxes.

ANS: D DIF: 3 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Proportional taxesMSC: Interpretive

46. When the marginal tax rate equals the average tax rate, the tax isa. proportional.b. progressive.c. regressive.d. egalitarian.

ANS: A DIF: 3 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Proportional taxesMSC: Analytical

47. Which tax system requires higher-income taxpayers to have lower tax rates, even though they pay a larger amount of tax when compared to lower-income taxpayers?a. A proportional taxb. A progressive taxc. A regressive taxd. A lump-sum tax

ANS: C DIF: 1 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Regressive taxesMSC: Definitional

48. If a tax takes a smaller fraction of income as income rises, it isa. proportional.b. regressive.c. progressive.d. based on the ability-to-pay principle.


49. Which of the following statements is correct?a. A general sales tax on food is regressive when low-income taxpayers spend a larger proportion of

their income on food than high-income taxpayers.b. A general sales tax on food is regressive when middle income taxpayers spend a smaller proportion

of their income on food than high-income taxpayers.c. A general sales tax on food is regressive when high-income taxpayers spend a larger proportion of

their income on food than middle income taxpayers.d. A general sales tax on food is regressive when high-income taxpayers spend a larger proportion of

their income on food than low-income taxpayers.

ANS: A DIF: 2 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Regressive taxesMSC: Analytical


50. Which tax system requires higher-income taxpayers to pay a higher percentage of their income in taxes?a. A progressive taxb. A proportional taxc. A regressive taxd. A lump-sum tax

ANS: A DIF: 1 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Progressive taxesMSC: Definitional

51. You are trying to design a tax system that will simultaneously achieve both of the following goals: 1) two people with the same total income would pay taxes of the same amount, and 2) a high-income person would pay a higher fraction of income in taxes than a low-income person. Which of the following tax systems could achieve both goals?a. A lump-sum taxb. A regressive taxc. A progressive taxd. A proportional tax


52. You are trying to design a tax system that will simultaneously achieve both of the following goals: 1) a person with no income would pay no taxes, and 2) a high-income person would pay a higher fraction of income in taxes than a low-income person. Which of the following statements is correct?a. A lump-sum tax would achieve the second goal but not the first.b. A regressive tax would achieve the second goal but not the first.c. A progressive tax could achieve both goals.d. A proportional tax could achieve the second goal but not the first.


53. When the marginal tax rate exceeds the average tax rate, the tax isa. proportional.b. regressive.c. non-egalitarian.d. progressive.

ANS: D DIF: 3 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Progressive taxesMSC: Analytical

54. Suppose that the government collected taxes in the following fashion: people who earn less than $50,000 pay 25 percent in taxes, people who earn between $50,000 and $100,000 pay 35 percent in taxes, people who earn between $100,000 and $200,000 pay 30 percent in taxes, and people who earn more than $200,000 pay 28 percent in taxes. Which of the following statements is correct?a. The tax system is proportional for income levels less than $50,000 and regressive for income levels

above $50,000.b. The tax system is regressive for income levels less than $100,000 and progressive for income levels

above $100,000.c. The tax system is progressive for income levels less than $100,000 and regressive for income levels

above $100,000.d. The tax system is progressive for income levels less than $50,000 and proportional for income

levels above $100,000.

ANS: C DIF: 2 REF: 12-3NAT: Analytic LOC: Efficiency and equityTOP: Progressive taxes | Proportional taxes | Regressive taxes MSC: Analytical


Table 12-17TAX A TAX B TAX C TAX D

INCOME AMOUNT OF TAX AMOUNT OF TAX AMOUNT OF TAX AMOUNT OF TAX$50,000 $12,500 (25%) $15,000 (30%) $10,000 (20%) $15,000 (30%)100,000 $25,000 (25%) $25,000 (25%) $25,000 (25%) $15,000 (15%)200,000 $50,000 (25%) $40,000 (20%) $60,000 (30%) $15,000 (7.5%)

55. Refer to Table 12-17. A regressive tax is illustrated by taxa. A only.b. B or D.c. C only.d. A or D.


56. Refer to Table 12-17. A proportional tax is illustrated by taxa. A.b. B.c. C.d. D.

ANS: A DIF: 2 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Proportional taxesMSC: Analytical

57. Refer to Table 12-17. A lump-sum tax is illustrated by taxa. A.b. B.c. C.d. D.

ANS: D DIF: 2 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Lump-sum taxesMSC: Analytical

58. Refer to Table 12-17. A progressive tax is illustrated by taxa. A.b. B.c. C.d. D.


59. The flypaper theory of tax incidencea. ignores the indirect effects of taxes.b. assumes that most taxes should be "stuck on " the rich.c. says that once a tax has been imposed, there is little chance of it changing, so in essence people are

stuck with it.d. suggests that taxes are like flies because they are everywhere and will never go away.

ANS: A DIF: 2 REF: 12-3NAT: Analytic LOC: Efficiency and equityTOP: Flypaper theory of tax incidence MSC: Interpretive


60. Who pays a corporate income tax?a. Owners of the corporationb. Customers of the corporationc. Workers of the corporationd. All of the above are correct.

ANS: D DIF: 2 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Corporate income taxMSC: Applicative

61. When the government levies a tax on a corporation,a. all the burden of the tax ultimately falls on the corporation’s owners.b. the corporation is more like a tax collector than a taxpayer.c. output must increase to compensate for reduced profits.d. less deadweight loss will occur since corporations are entities and not people who respond to

incentives.

ANS: B DIF: 2 REF: 12-3NAT: Analytic LOC: Efficiency and equity TOP: Corporate income taxMSC: Applicative

62. Many economists believe thata. the corporate income tax satisfies the goal of horizontal equity.b. the corporate income tax does not distort the incentives of customers.c. the corporate income tax is more efficient than the personal income tax.d. workers and customers bear much of the burden of the corporate income tax.


63. Which of the following is not a way that a corporate tax on the income of U.S. car companies will affect markets?a. The price of cars will rise.b. The wages of auto workers will fall.c. Owners of car companies (stockholders) will receive less profit.d. Less deadweight loss will occur since corporations are entities and not people who respond to

incentives.


Sec04 - The Design of the Tax System - Conclusion-The Trade-Off Between Equity and Efficiency

MULTIPLE CHOICE

1. Goals of efficiency and equity in tax policy area. complementary in most countries.b. necessary for application of the ability-to-pay principle.c. often in conflict with each other.d. easier to achieve when tax codes are complex.

ANS: C DIF: 1 REF: 12-3 | 12-4NAT: Analytic LOC: Efficiency and equity TOP: TaxesMSC: Applicative


2. In choosing the form of a tax, there is often a tradeoff betweena. allocative and productive efficiency.b. profits and revenues.c. efficiency and fairness.d. fairness and profits.

ANS: C DIF: 2 REF: 12-3 | 12-4NAT: Analytic LOC: Efficiency and equity TOP: TaxesMSC: Interpretive

3. Which of the following tax systems is the most fair?a. proportional taxesb. regressive taxesc. progressive taxesd. There is no objective way to assess fairness among the three systems.

ANS: D DIF: 2 REF: 12-3 | 12-4NAT: Analytic LOC: Efficiency and equity TOP: TaxesMSC: Interpretive

4. Economists play an important role in the complex debates over tax policy bya. identifying efficiency as the most important goal of tax policy.b. identifying equity as the most important goal of tax policy.c. shedding light on the tradeoff between efficiency and equity in tax policy.d. None of the above is correct.

ANS: C DIF: 2 REF: 12-3 | 12-4NAT: Analytic LOC: Efficiency and equity TOP: TaxesMSC: Interpretive

Chapter 12

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